Property development after the crash

Abstract

Since the October 87 sharemarket crash. 11 out of 31 listed property development companies have gone into receivership. Today the property market is in a 1imbo situation, with many companies desperate to sell commercial property in an almost non existent market. This report looks at the background to today's property development environment. The report also takes a cross section of five property development companies, and looks at the repercussions of the crash on these companies, and the new strategy adopted to survive in this climate. In the euphoric period before the crash, companies were prepared to borrow to invest in property and the sharemarket because they found the value of these assets kept going up. A lot of the assets bought were not really generating much income. The way companies were able to generate cash was to sell an asset at a higher price then they paid for it. The crash left property development companies with lower asset values, with the same level of debt as before the crash against these assets. It removed potential demand for new office space, as businesses reconsidered expansion plans. The crash also removed the speculative element from the property and sharemarket. The downturn in the property market was not directly linked to the sharemarket crash. A major factor was the Government's announcement on the 16th December 87, removing the tax incentive for superannuation and life schemes. Removing the major institutional buyers of central business district property, from the market place. The poor state of the property market was exacerbated by secondary factors such as land tax and a new rating system in Wellington introduced in early 1988. These factors have hit the property companies hard. The studies found companies sustaining the worst losses, were those investing and trading in other company shares. All companies, since the crash have drastically reduced their holdings of equities, and began selling off non strategic assets. The property development market looks grim for the next year or two. It requires a return of confidence and growth in the economy. New developments will only proceed if they are at least 80% pre-leased or development is pre-sold. Developers will be paying more attention to quality and user requirements to attract the tenants.