Article: Property Investment
Rates And Debt In The Kingdom Of Maurice with Frank Newman
All is not well in the Kingdom of Maurice. The newly elected mayor of our district has some big and difficult issues to deal with. Most are not of his making but they are his to sort out.
The draft annual report for the year ended June 2011 is a shocker. What should have been an operating surplus of some $27 million has turned into a $5 million loss. A $32 million turnaround is a major event and needs some serious explaining – something more than “we will do better in the future”. We have had that excuse for too long now. Truth is, when one looks back the council has almost without exception never achieved the surplus it has promised. It has consistently over-spent resulting in a rapid escalation of council debt.
This financial ill-discipline goes back as far as 2002 when central government expanded the powers of council’s from the provider of community infrastructure to the providers of community well-beings. That liberty allowed councils to take on the role of community care-giver which is, it is fair to say, of more interest to most councillors and more rewarding politically than mundane things like money and living within a budget.
I don’t think I am being unreasonable or unkind by saying that few councillors understand council finances. The good news is they don’t really need to – that’s why they have staff. The one thing they do need to do is make sure the council’s chief executive (the one and only person councillors hire or fire) achieves budget. If their sole employee is not up to the job of doing so, then they should find someone who can. Life for a councillor really is as a simple as that. They set the objectives and budget, the CEO carries them out.
The second problem faced by mayor Maurice is how to stop the debt spiral. As the government of Greece knows, there are only two ways: cut spending (what the Greeks call austerity measures) or sell assets.
Our council has adopted the latter. Some $40 million dollars worth of ground leases are now being offered for sale by the council. These are assets that were vested in 1989 when the Harbour Board was dissolved and the assets divided between the district and regional councils.
As an investment asset ground leases are a super-star – virtually no risk, and a minimum 6.5% cash flow linked to rising land values. It is therefore no surprise that large pension fund managers would fall over themselves to buy the ground leases should the opportunity arise.
Unfortunately selling the ground leases does not solve the problem – it only delays it. The problem is financial ill discipline and recidivist over-spending. That’s the issue that needs to be addressed, either now or later when the council does not have any more investment property to sell. Poor financial management by our council affects all 70,000 or so people who live in our district - we are all reminded of that when we receive our rates notices.
Meanwhile councillors have been hearing submissions on earthquake prone buildings. There is of course pressure on councils to react to the devastation of the Christchurch earthquake - it’s the “in” topic politically and most council are likely to impose tougher rules.
Unfortunately, tougher rules will come at a price, and that price will be paid in the first instance by property owners then trickle down to tenants by way of increased rent. Unfortunately, our CBD is not a picture of prosperity and there has been a migration of retailing activity to the city fringes where floor plates are bigger and parking is free and more convenient. Imposing further cost on CBD landowners will accelerate that trend.
There may well be a good case for increased earthquake standards in our district but one hopes that case is based on scientific evidence relating to the chances of a devastating earthquake occurring. If we don’t know that risk then perhaps it is better scientific data we need rather than more regulation.
