Text of a letter supplied by Kensington Park developer Patrick Fontein that is being posted to the "owners and purchasers" of property at the Orewa development.
KEY POINTS:
Dear
I have personally wanted to keep you far more fully informed on issues relating to Kensington Park over the last 1-2 months, as that is my personal nature and style. Since early August, as my team and I have tried everything to refinance/rescue the project, I have been under direct legal guidance as to whom I could and could not communicate with and what I could say.
There has been total commitment from all my staff and key stakeholders to try and keep the project going, for which I am very grateful. Personally, I have left no stone unturned. When the market got tough, I put everything I and/or any trust or company I own on the line. In poker terms, I was "all in".
I want to personally reassure you that all purchaser deposit funds have always been held in an independent solicitor's trust account and all Residents Society fees are likewise safely held in an independent bank account. None of these funds are at risk. In a similar vein, during refinancing negotiations, I have always maintained that the sub-contractors/suppliers should get a fair deal. Some say that creditors are unsecured and as such should not need to be considered. I have always strongly opposed this view and still do. It is not in my moral fibre to think this way.
Most people are questioning why a hugely desirable, award winning development could falter in this way. In my opinion, these are the main reasons:
i) Worldwide turmoil in the finance markets. Financial institutions, worldwide, are collapsing and there is major stress on all banks, including Australia and New Zealand owned banks.
ii) Huge pressures on New Zealand finance companies, 32 of which have collapsed. Most other finance companies in New Zealand are experiencing major stress.
iii) The banks' and finance companies' response to the finance market turmoil has been to progressively tighten their lending/credit conditions on all property developments.
iv) There has been a major review of how land is valued (and thus, funded) within the valuation and finance industry, worldwide and in New Zealand. I will give a real example of a developer in greater Auckland who experienced this situation just last week.
The developer owns a piece of land in greater Auckland that he intends to develop when the market improves. He has owned this land for some time and two years ago, a registered valuer valued the land at $4million. The developer has a $2million first mortgage, which is a conservative loan-to-value ratio of 50 per cent. During the last two years, the land has been well looked after and not altered. All interest payments on the mortgage have been met. The same valuer has now revalued the land and, due to market conditions, it is now worth only $1.5million. This has placed all stakeholders in a very difficult position.
This situation is totally unrelated to Kensington or Kensington Park, and the numbers are different. However, similar issues exist.
v) Collapsed New Zealand housing market. The effect on all developers/house builders has been pronounced. Almost all subdivisions have house starts stalled.
So how does this affect Kensington Park?
a) Market changes to valuing land have had a dramatic impact on our ability to fund land.
b) The infrastructure (reasonably) required by the Council is for 750 houses. As credit conditions have tightened, funding this infrastructure has become increasingly difficult.
c) The master-planned Kensington Park concepts have been very desirable and pre-sales have been extremely strong until very recently. Whilst difficult to explain/comprehend, the high level of pre-sales in a tightening credit market has actually placed increased pressure on the short to medium term cash flow. Sales demand during the extremely difficult market conditions this winter has softened, which has been of concern to the financiers.
The dollar numbers at Kensington Park are large, very complex and commercially sensitive. I believe it serves no useful purpose for me to discuss these issues in the public or media.
I am very proud of the architecture, design and build quality at Kensington Park, as should all the sub-contractors and suppliers. I have heard unfounded insinuations of potential leaking buildings, workmanship issues, ground movements, etc., which are outrageous and without any substance. People who make these comments, and media who publish it, have a lot to answer for.
The net result for me personally is that after 14 years of hard work to grow the Kensington Group of companies and over three years at Kensington Park, I will lose all these companies. I have been very proud of our achievements, which have included winning many national and international awards on our projects. In the end, this now counts for nothing as my family and I will lose everything.
My biggest concern, however, is for the future go-forward for the Kensington Park project. Having visited about 120 master-planned communities (MPCs) in New Zealand, Australia and the USA, all the successful MPCs are carefully managed and controlled throughout the development / build out process. The provision of community facilities helps to engender a sense of community spirit for all the residents. All the successful communities focus on very careful design control and releasing land and/or buildings to the market at a time relative to demand, i.e. they do not saturate the market with product.
Kensington Park now has two potential outcomes after completing the near finished Stage 1B buildings and the six Seaview homes.
1. The receiver could sell the entire project to an entity which might continue with a MPC, either similar to the current plan or varied. This entity may complete buildings itself (as Kensington has done) or gradually release development pads to other builders. Or,
2. The receiver could cut up the site and sell each development block to the highest bidder, resulting in 4-8 developers simultaneously buying land.
"Economics 101" states that any business should work hard to increase demand whilst carefully releasing supply. If you get the supply v. demand mix right, gradually prices will increase.
Of the 120 MPC projects I have visited, the only time I have seen this second option used is at Gulf Harbour, Whangaparaoa. The other 119 projects have seen that it makes no economic, long-term sense for all the project stakeholders to bulk release large chunks of land. Why is this? When you have 4-8 developing landowners all buying land at the same time, they have to compete against each other to commercially survive. The result is a price war where each of the developers has to start developing quickly to recover their land holding costs. The eventual effect of the price war is a reduction in building quality, i.e. build it for $10,000 cheaper = sell it for $10,000 less. All properties within the MPC would spiral down in value, including the existing owners' homes. Eventually the remaining development land also reduces in value. This is exactly what has happened at Gulf Harbour, the design and build quality has suffered and the remaining land is now worth very little. Existing property prices at Gulf Harbour have collapsed. Good, well managed MPCs have increasing land and building values.
As I have said, my main concern is that the long term potential of Kensington Park is realised and that the current house and apartment owners and purchasers achieve what they sought when they first purchased. I have, and will continue to make myself available to work with or for any development entity that wishes to continue a comprehensive quality MPC.
I again apologise for the lack of recent communication. However, I trust the above goes some way towards assisting in the current, extremely challenging circumstances.
Yours faithfully,
PATRICK FONTEIN
