Shock for high-rise investors

By ANNE GIBSON

Investors in Takapuna's Spencer on Byron hotel/apartment tower will have their guaranteed annual returns halved because of dismal returns.

The hotel operator has also threatened to recoup previous payments.

Hawaii's Castle Group, which runs the hotel in the 23-level tower, is blaming the events of September 11, airline problems and a drop-off in tourism on low occupancy rates.

It has invoked the force majeure clause which enables it to alter its leasing arrangements, claiming the poor returns have nothing to do with how it is running the hotel.

Investors bought units expecting that the hotel would rent out their rooms and pass on some of the proceeds.

Robert Young of Milford is one of the Spencer on Byron investors not happy with the drop in income. He was enticed by a promised 8 per cent return annually from his unit in the 249-room tower.

But he and other investors will get only 4 per cent, said Castle Group's chief executive Rick Wall.

Young said in the Herald last year that he knew how to double his money by buying one of the units and allowing the hotel to rent it. He promised to invite his mother, Pauline Young of Palmerston North, to stay in the unit over Christmas as part of a deal where investors get 14 days free stay in their units a year.

At the time, Young worked for the tower's developer, Jim Speedy's Covington Group, but he has since moved to another developer, Redwood Group.

He was marketing sales of the units last year and claimed the deal was so good that he could not resist borrowing about $100,000 to buy a unit on level 19, which he claimed would pay for itself due to the 8 per cent promised return.

Now investors like Young will have to take half that. The cost of any money they have borrowed will also eat into their profits as interest rates rise.

Young said the hotel occupancy had been high and he could not understand how Castle could invoke the special clause. He was upset about having the return halved and said Castle was running a risk of investors removing their units from the hotel rental arrangement and tenanting them privately for a better return.

"I find it bizarre because the hotel seems to have done well. It's always busy and you can't get a room there," he said.

Wall said about 250 investors, mainly from Asia, bought hotel rooms.

A portent of what could happen at Spencer on Byron came last year at Metropolis, which is gradually reverting from a hotel to an apartment tower due to poor returns from hotel guest occupancies.

There, units bought off the plans had dropped in value by about 30 per cent, said Martin Dunn of City Sales, which has been handling many of the Metropolis re-sales.

Wall said Castle was entitled to recoup payments it had made to investors since the hotel opened last year: "But the company, in seeking to establish a long-term relationship with its investors, is not making a formal demand at this time," he said.

The monthly returns would be halved from this month until November next year, he said. The 4 per cent was calculated after the payment of rates, insurance and body corporate fees.

Young said he had already made a gain after buying unit number 1914 on the 19th floor for $256,000 and selling it in December for $277,000. But he owned another unit in the complex and was worried about the future.

In its marketing, Covington Group promised investors an 8 per cent return, guaranteed for the first two years.

After that, a guaranteed minimum of 8 per cent would apply for three years and a minimum of 6 per cent for the next five years.

The tower development was a joint venture between the Covington Group and Oenone Spencer on land that had been owned for many years by the wealthy Spencer family.

"I am pleased to have found such a fitting use for the land," Oenone Spencer said at the time the tower was built.

Covington's Speedy also praised the deal, saying pre-sales of 91 per cent of the units before construction was a "record selldown".

Wall said Castle was excited about coming here and promised that the tower would be the group's flagship in New Zealand. Castle has a 10-year management agreement with a right of renewal for another 10 years.

Speedy said Covington's development company owned five units in the hotel, left with the unsold stock when the building was finished. Although it had deposits for the sale of these units, Speedy said he did not expect them to settle now after the bad news from Castle.

"I'm shattered to hear about this. I don't know what to do," he said. Speedy also said he thought the hotel had high occupancy levels.