Book Reviews | Gordon Campbell | News Flashes | Scoop Features | Scoop Video | Strange & Bizarre | Search

 


Apocalypse Wellington | 500 Words

Apocalypse Wellington | 500 Words

It's as if an earthquake has hit Wellington. Only no one will talk about it publicly, and nobody is willing to speak its name.

It was the same earthquake that hit Christchurch.

In Wellington it rended asunder a market fault-line.

As I understand it the facts are roughly this.

Before the earthquake in Christchurch the Government had a $1 Billion excess $5 Billion reinsurance contract for earthquake damage - which automatically reset following a major event - we claimed $10 Billion on this policy.

We now have a $1 Billion excess $1.5 Billion EQC reinsurance contract in place - for the nation. I think that the rough figures for premiums were $500 million a year for the $5 Billion + facility and $250 million for what we have now.

For earthquake damage NZ Inc. is - by necessity - self-insuring. Like the Japanese.

And we need to remember this happened last time we had a massively damaging quake - in Napier in 1931. EQC 1.0 died on February 22 2011. EQC 2.0 is yet to be created.

So how does this work out for Wellington?

Sources tell me that insurance chiefs from the biggest reinsurers in the world are now pricing Wellington as "ground Zero for earthquake reinsurance risk" in the world. Not the Asia-Pacific. Not the ring of fire. The world.

And as a result practically speaking earthquake reinsurance cover is not practically available for commercial property in Wellington.

Yes some policies are being written on some buildings (usually ones which are up to code and have blue chip tenants) for 400% to 600% premium increases.

And there are also policies being written for "functional" replacement - i.e. a specific less costly remedy.

But for most of the city the insurance premium increases are unaffordable and irrational. In some cases they more than double the costs of building ownership. For unit title flat holders the prospect of monthly insurance bills in the order of $400 a month is normal, on a property which is no longer saleable and possibly in a negative equity.

For the purposes of illustration I provide a single example. Relatively new suburban building, outside of the CBD with retail, apartments and carparks. Unimpaired value $2.8 million, replacement insurance quote is for $5.8 million rebuild cost and quoted premiums are way up.

What will happen to the value of this building? To the businesses and apartment holders in it?

In the Wellington commercial property market full insurance is a condition of all the mortgage business. Full replacement earthquake insurance is a standard term and condition.

In NZ most companies which carry business interruption insurance also need to have earthquake interruption cover to satisfy the conditions of the bank credit facilities. These often include warrantees around the quality of the building that business is being conducted out of - including the existence of earthquake insurance cover.

So what does this mean?

It means that the Wellington CBD property market is frozen. The only purchasers are ones which are buying with cash. There are hundreds, possibly thousands, of distressed mortgaged unit title and company share owners in the city.

It means rentals are falling and landlords are getting creative.

But above all else it means an enormous impairment -i.e. write down - of:
1) property assets (estimated in the $10+ Billion effective immediately across Wellington); and
2) the mortgages which are collateralised against those assets.

Knowing all the above, but being frustrated that literally nobody is willing to go on the record about this stuff - I recently ran into a finance guy and we had a chat.

I asked him what the story was inside the banks (he was in a position to know).

He confirmed the thesis that there are massive unrealised property losses in the Wellington and Auckland commercial property markets. And he also confirmed that everybody knew this was the case.

He said the current response of everybody was "head in the sand", adding, "don't get me wrong, not head in the sand don't know, head in the sand deliberately."

But what about IFRS accounting standards? I asked.

At which point he shrugged.

So it's just a matter of time?

Yes.

So what needs to be done?

This problem is not going to go away by itself. At present the banks are being accommodating with their commercial property debtors because the alternative is mutually assured destruction. There is nothing to be gained from banks taking ownership of all the property in Wellington.

But every mortgage document for every commercial property in Wellington needs to be amended. And probably many business loan agreements also. For this to happen new insurance arrangements - acceptable to creditors and debtors alike - need to be put in place for owners of property and businesses. It is likely that these will need to exclude earthquake cover for equity but include cover for loans lent against assets.

One suggestion being discussed is that central Government - through the EQC and possibly the Reserve Bank - could provide a "loan protection insurance scheme" which enables banks and debtors to at least insure the loans made against Wellington properties. Enabling them to at least roll-over all existing mortgages when they come to term.

But for this to happen central and local government, and banks need to get together and move very very fast.

At the moment nobody is even publicly acknowledging there is a problem.

- Alastair Thompson | 500 Words Wednesday, 13 March 2013

Comment on this article at Wellington.Scoop: Apocalypse Wellington

© Scoop Media

 
 
 
 
 
Top Scoops Headlines

 

Werewolf: Artificial Intelligence: Real Anxieties?

The movie Ex Machina feels so current there are powerful moments of recognition – despite the seemingly unlikely scenario of a walking, talking artificial intelligence (AI). Right now Google is enlisting its massive databases, drawing on the contents of every email and Internet search ever made, in the service of what has been called ‘the Manhattan Project of AI’. More>>

ALSO:

Open Source, Open Society: More Than Just Transparency

Bill Bennett: “Share and share alike” is the message parents drum into children. But once they grow up and move out into the wider world, the shutters start to come down. We’re trained to be closed. Dave Lane, president of the New Zealand Open Source Society, says that explains the discomfort people find when they first encounter the open world. More>>

ALSO:

Werewolf: Journalism, History And Forgetting

Compare that [the saturation coverage of WWI] not just with the thinly reported anniversaries last year of key battles in the New Zealand Wars, but with the coverage of the very consequential present-day efforts to remedy the damage those wars wrought, and the picture is pretty dismal. More>>

ALSO:

Werewolf: Climate Of Fear

New Zealand, promoting itself as an efficient producer, has been operating as a factory farm for overseas markets with increasing intensity ever since the introduction of refrigerated shipping in 1882. The costs to native forests and to bio-diversity have been outlandish. The discussion of impacts has been minimal... More>>

ALSO:

Greek Riddles: Gordon Campbell On The Recent Smackdown Over Greece

There had been a fortnight of fevered buildup. Yet here we are in the aftermath of the February 28 showdown between the new Syriza government in Greece and the European Union “troika” and… no-one seems entirely sure what happened. Did the asteroid miss Earth? More>>

ALSO:

Keith Rankin: Contribution Through Innovation

The economic contribution of businesses and people is often quite unrelated to their taxable incomes. EHome, as a relatively new company, may have never earned any taxable income. Its successors almost certainly will earn income and pay tax. Yet it was eHome itself who made the biggest contribution by starting the venture in the first place. More>>

ALSO:

Get More From Scoop

 
 
 
 
 
 
 
Top Scoops
Search Scoop  
 
 
Powered by Vodafone
NZ independent news