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The far reaching effects of the Christchurch quake.

John writes …

Last week I was in Feilding for a coffee and I took time to check out a couple of the old buildings – you know, those red, double brick buildings that once would have been classed as historic buildings.  It made me stop and think about how the Christchurch earthquake will change the face of New Zealand for years to come. 

Today, many people just don’t feel safe working in these buildings.In May, the Palmerston North City Council (PNCC) issued a list of buildings that are below 33% of the earthquake code and that have a moderate risk of collapse in the event of a sizeable earthquake.  The owners of these buildings have been given until November this year, to accept the PNCC assessment and provide a building strengthening programme.

This isn’t just an issue for small town property owners.  Recently the Kiwi Income Property Trust indicated they would need to spend $35 million to strengthen Majestic Tower in Wellington.  AMP Office Trust proposed they will need to spend around $20 million on property strengthening over the next five years.

The issue for all property investors then, is that this is a cost, but probably isn’t going to add any real value to the balance sheet.  Unfortunately, if their buildings aren’t brought up to code, tenants will leave.  This is a trend we are already seeing, again, damaging property values.

Another complication of the focus on the new earthquake building code, is the behavior of the financiers.  Banks have indicated they are uncomfortable funding buildings that don’t meet the code.

This inability to find the funding to acquire older buildings, again reduces the value of any building that doesn’t meet the code.

On top of these issues, insurers have also become very concerned about their exposure to earthquakes.  Since 2010 we have seen two of the reinsurers leave the New Zealand market.  We have also seen very large general insurance companies withdraw from the New Zealand general insurance market.

The outcome of rising insurance costs, tenants moving, and banks nervous about funding high earthquake risk buildings, is the demolition of a number of these older buildings.  This will change the face of many small provincial towns in the years to come.