With Simplicity Living, Sam Stubbs and Shane Brealey want to upend the rental property market in New Zealand. Bernard Hickey spoke to them about why the local property development sector is so dire, and how they plan to change things.
This is an edited version of a post first published on Bernard Hickey’s Substack newsletter, The Kākā.
I’ve spent a long time covering the residential property development market in New Zealand, particularly for the type of medium-density dwellings that are desperately needed close to the centre of large cities. It is a sector that has bred its own culture of zero-sum-game cynicism, inflating costs and stunting any attempt at scale and affordability.
It created the finance company crises of 2007-11 that cost savers and taxpayers close to $5b and created the biggest hole in new home creation in New Zealand’s history, along with an exodus of skilled tradespeople to Australia, many of whom have never returned. It was a painful reporting exercise that shaped my view of whether we could ever build houses affordably in the right places for people on regular incomes.
Up until now, residential property development has been designed to take advantage of (or at least live within) a pronounced boom-bust cycle. It is profoundly broken.
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Now KiwiSaver fund Simplicity and apartment and townhouse developer NZ Living have teamed up to create Simplicity Living and a unique plan for Aotearoa: to build 10,000 homes worth $5b over 10 years with the sole aim of holding them and renting them out at affordable levels. In the process, they hope to expose the waste and hidden costs that currently make building flats painfully expensive.
This is not the way it’s done in local property development – a sector dominated by booms, busts, litigation, short-term thinking, and the overall aim of making tax-free capital gains on land price escalation, rather than building homes people will rent for years and years, possibly even decades.
Our current hodge-podge stack of developers, sub-contractors, buy-and-flick owners, agents and increasingly disenfranchised and desperate renters believe it can’t be done another way. They’re told and tell each other that chronic shortages of land, building materials and skilled tradies – and the focus on homes as investments – mean it is impossible to build houses more affordably. These are the underlying assumptions that have been behind all sorts of government, Reserve Bank, council and investor actions for decades. There is no alternative, we’re told.
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But is that true?
On the latest episode of my Spinoff podcast When the Facts Change I speak to Simplicity CEO Sam Stubbs and NZ Living co-founder Shane Brealey, who have both spent years soaking in the industry’s norms and practices. Over the last decade they’ve disconnected themselves from those usual modes of operation to do things differently. Now they have a plan to become one of New Zealand’s biggest home builders and owners, which is able to ride through the ups and downs of the markets to build and operate affordable and liveable homes.
Effectively, they want to dismantle the “stack” that currently dominates house building and find a way to solve the massive challenge our cities face: building tens of thousands of new medium-density apartments and townhouses that cost way less to rent that the current crop, relative to incomes, and doing it in a way that reduces climate emissions and creates stable, safe and nourishing communities.
They’re breaking the usual rules to do it
Simplicity is a not-for-profit KiwiSaver fund manager that has focused on keeping its systems and practices low-cost since it launched five years ago. It now has 75,000 members and $4b in funds under management, with members paying an average of $400 a year in fees, far lower than most for-profit funds. Simplicity is now one of the default KiwiSaver providers. (Disclosure: I’m a Simplicity KiwiSaver member)
NZ Living was set up by Shane and Anna Brearley as a residential property developer using “Kaizen” techniques to strip out waste and cost. A Kāinga Ora developer, NZ Living is on track to build 720 homes over the three years to the end of 2022.
NZ Living don’t run tenders for projects. They don’t try to play suppliers and partners off against each other or try to circumvent local building materials suppliers. Instead, they focus on refining out cost and waste in both materials and processes. They pride themselves on not having groups of subbies standing around high-viz waiting for directions, materials and systems to get through the traffic jam at the gate.
They’ve gone out of their way to avoid a culture that has left dozens of business collapses in its wake – just google Ebert, Mainzeal, Soho Square, Layne Kells, Mark Hotchin, Hanover Finance, Strategic Finance, Orange-H Group, Stanley Group, Bridgecorp and Tower Cranes for examples. That property development culture is the reason second-tier lenders charge double-digit interest rates on short-term interest-only loans that can explode in everyone’s faces if there’s a change of market sentiment, consenting delays or problems for apartment buyers getting funding from banks. It’s the reason contractors layer on cost at every opportunity to make up for the inevitable payment delays, litigation and collapses.
The music will always stop
That property development culture is also the reason few want to build systems and train apprentices, knowing the bust is just around the corner and no one wants to be left holding the parcel of explosive debt, contracting bills and litigation fees when the bust inevitably arrives.
And it’s the reason no one in the sector takes a strategic or long-run approach to planning developments over decades. The culture is fantastic for:
- Construction industry lawyers and litigators;
- Mezzanine financiers hoping to lend high, repossess low and sell high;
- Buy-and-flick merchants using the natural leverage of apartment deposits and never-ending price increases to make property trading gains;
- Insolvency practitioners and agents able to set their own fees in the restructuring and sale of assets;
- Cowboy-boot wearing Ferrari-driving property developers with an excellent line in phoenixing their companies and timing their entries and exits to both take advantage of and then avoid the booms and busts.
The losers?
- The finance company investors left holding worthless paper when they go bust, as many of them will.
- Renters who pay over 50% of their disposable income to live in insecure, poorly maintained and unhealthy homes, and their kids who bounce from school to school and then into the Emergency Department with skin, chest and brain infections;
- Employers in the likes of Auckland and Wellington who are mystified as to why they can’t attract staff to work in their offices or keep their existing staff from moving for cheaper rents and the chance of buying a home in Sydney, Melbourne, Brisbane or the UK.
“The construction industry is kind of like the finance industry – it’s a filo pastry of fees,” Simplicity’s Sam Stubbs says in the podcast.
NZ Living’s Shane Brealey began in the construction industry 35 years ago as an engineer fresh from Canterbury University. He was lucky enough to study Kaizen techniques, often known as the Toyota Way, when working at LendLease, which builds massive amounts of apartments in Australia.
“I’ve been in that pyramid contracting spiral, lowest-price tender game,” Brealey says. “That invariably means tendering at certain points, and the rest cascades into just a jungle of waste and confusion and waiting and overpricing and under delivery and poor outcomes.”
He initially set up his own construction firm 15 years ago, but decided to created an integrated supply chain of sorts that included the design, financing and ownership of apartments and townhouses.
Brealey and Stubbs have done the calculations and believe their top-to-tail system of funding, designing, building and owning cuts out 35-40% of the cost of building these homes.
‘All about waiting and opportunism’
I asked Brealey why the rest of the industry had developed in such a toxic way.
“Two words: waiting and opportunism. If you look at any construction site at any time… tell me how many people are actually building that project, and how many are waiting, standing, talking, chatting, looking for an instruction, looking for approval, waiting for a drawing, and all that type of stuff. It has to be paid for,” he says.
“Which brings me to the second word: opportunism. If you’re a quantity surveyor pricing as a subcontractor or building contractor, you’re only guessing how much waiting you’re going to have to do… And so you invariably put on as much contingency as you think you can get away with, whether you spend it or not.”
A filo pastry of fees
Strip out the waiting and opportunism and NZ Living can focus on the building.
“Michael Schumacher, his favorite thing was go-kart racing rather than Formula One, because it was pure racing. And so what we’re doing here is we’re pure building,” says Brealey.
Simplicity plans to create a rental management operation that offers much longer-term tenancy agreements for homes designed to be rented, and lived in as communities.
“We intend to own these for 100 years and rent them affordably on very long term rental contracts. For 100 years, they got to be built really well. So actually it’s not actually about saving costs. It’s about building something to last,” says Stubbs.
“You can do things much cheaper, but here’s the trick, the secret sauce – most people build development sell homes with a five year view at most. You just want to develop it and sell it to make a margin. So they start thinking about as a property asset, and I want property type margins for all that risk, right? We’re derisking it by vertically owning it, the whole thing.
“We will end up actually owning a whole lot of homes that are incredibly high quality, but also incredibly good value.”
Simplicity’s plan is for certain of its KiwiSaver funds, and its investment funds, to own and provide funding to Simplicity Living through a wholesale funding arrangement. The funds will get the capital growth and income generated.
Stubbs thinks the build-to-rent business is an attractive substitute for fixed-interest investments like bank deposits and investment-grade bonds.
“Rather than stick the money in the bank and get 1% return, instead we can rent them out to people and get two or three times that over 100 years. That’s a fantastic investment. For those of you who are financially inclined, it’s like it’s a perpetual and floating-rate inflation-adjusted bond.
“The instrument doesn’t exist in the New Zealand market. You have to create it by creating long term rental streams.”
A different approach
Stubbs says a longer-term view will be crucial to the project’s success.
“You need to have a lot of money and you have to have it more vertically integrated. You got to be prepared to control and own things, rather than get into this eternal finger pointing that goes on in the industry, blaming someone else for the excessive costs,” he says.
Brealey is looking forward to utilising the NZ Living approach to property development on a grander scale than ever before.
“We’ve got one person doing what we used to have four people doing, and the rest of the market probably takes eight people to do. Our labour costs and our labour numbers have plummeted as we’ve innovated and become more productive,” he says.
“I’m guessing that we’ll probably get first choice on the parties that we want because we’re such low risk, predictable and enjoyable, pleasant sites to work on, when you’re working collaboratively.”
Stubbs is blunt about how different Simplicity Living’s approach will be.
“There’s three magic words there: ‘we trust you.’ It’s amazing what you get out of somebody when you trust them. This industry is so built on mistrust, margin-shaving and litigation and chipping each other. It’s just rubbish.”