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Housing New Zealand Corporation Board
Investment Committee
14 March 2016
McLean Flats Redevelopment Project
Acting General Manager Asset Development
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Executive Summary
1. This business case seeks Investment Committee support of the recommendation to
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Board for approval of the proposed McLean Flats Redevelopment project at 314 The
Terrace, Wellington, involving the redevelopment and refurbishment of 34 new units
inclusive of seven car parks.
Recommendations
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2. It is recommended that the Housing New Zealand Investment Committee:
a)
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9(2)(i)
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b)
note approval of this business case is subject to negotiation of a suitable build
contract with the preferred supplier.
c)
note the proposed redevelopment will increase rental income potential from a
potential of $0 to $703k per annum, which despite it being over the Ministry of Social
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Developments (MSDs) maximum rental threshold, MSD have confirmed they will
match due to location, demand and typology.
d)
note
9(2)(i)
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e)
recommend the redevelopment and refurbishment of 34 new one bed units inclusive
of seven car parks with no community room, replacing 16 existing vacant units at 314
The Terrace, Wellington be presented to the Board for approval.
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f)
recommend the total investment of $11,881k for the McLean redevelopment which
includes the construction cost of $10,771k and the value of existing land and assets,
being $1,110k (all figures adjusted for inflation), noting there is no write-down of
existing assets be presented to the Board for approval.
g)
note the project will be funded by the redevelopment budget which forms part of the
existing FY15/16, FY16/17 and FY 17/18 Budget and aligns with the unit
development costs contained in this budget.
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h)
note that the People and Property group support the development proposal.
i)
note the McLean Flats redevelopment is consistent with the Asset Management
Strategy, Wellington Community Action Plan and Wellington Reconfiguration
Strategy.
Background
3. On 17 July 2013, the Asset Investment Committee, now Investment Committee
endorsed:
the proposed retention and refurbishment of the McLean Flats,
consideration of developing new terraced units on the McLean site – so that the
property returns up to a circa 40 units.
4. In October 2011, the McLean Flats were vacated following a seismic and strength
assessment rating. Durability testing carried out also estimated the life span of the
building providing refurbishment is completed at 50 years.
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5. On the 29 August 2013, the then Asset Development Manager presented to the Board
noting that the McLean Flats were below HNZC’s standards and required major upgrade,
including seismic and structural repairs.
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6. At the same meeting, the Board directed management to advance discussions with
Victoria University Wellington to sell the combined McLean and Gordon Wilson site, with
appropriate easements and access to allow Housing New Zealand to subdivide off and
retain the McLean Flats and the site area required for the proposed terrace-houses –
noting the Right of First Refusal (RFR) would apply. Management was also asked to
provide an outline of the wider Wellington Demand and supply view which would
supports the retention of stock in the Wellington region and investigate the best economic
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option(s) for the Mclean flats building – refurbish, demolish and rebuild in compliance
with current planning rules. For referencing purposes the update as provided to the
Housing New Zealand Board, 29 August 2013 is provided in the Diligent Resource
Centre.
7. In early 2014, Housing New Zealand went to market for Design Build proposals to deliver
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predominantly 2 bedroom units on key redevelopment sites in Wellington city. A
subsequent review of these proposals identified a need for the business to gain a greater
understanding of the Wellington city portfolio and the role, in particular, of the central city
redevelopment opportunities in supporting improved housing outcomes and portfolio
decisions across the city.
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8. As a result, a cross-organizational project team from the Asset Development, Property
Services and Tenancy Services (now People and Property) groups was established to
provide analysis of the our tenants, portfolio and redevelopment opportunities, which
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would later inform the development of the Wellington Reconfiguration Strategy. Analysis
for the strategy identified that there was strong internal and external demand for one
bedroom properties throughout the central Wellington area which had the potential to
house tenants, particularly requiring access to key social and support services and
amenities located within the central area. This paper was presented and approved by the
Board in July 2015.
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9. The proposed development brief seeks to implement the Wellington Reconfiguration
Strategy by providing additional one bedroom supply within the city. The delivery of one
bedroom supply in this location enables better tenant outcomes by facilitating ease of
access to services and amenities which may assist tenants to maintain their tenancies. In
turn, this redevelopment provides Housing New Zealand with the opportunity to increase
capacity to consider reconfiguration options that enable the organization to rebalance the
portfolio and allow for tactical divestment and investment to improve the overall age and
quality of assets.
10. Furthermore, current Ministry of Social Development (MSD) Purchasing Intentions to
2018 outline a need for additional one bedroom units within Wellington above all other
bedroom configurations. This development brief would assist in meeting this future
demand.
Appendices
11. There is one appendix to this paper:
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Appendix 1:
Business Case – McLean Flats, Wellington
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Patrick Dougherty
Glen Sowry
Acting General Manager Asset Development
Chief Executive Officer
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APPENDIX 1: BUSINESS CASE – McLean Flats
Housing New Zealand
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Business Case - McLean Flats
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Development, The Terrace,
Wellington
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Prepared by:
Andrew Showler
Prepared for:
Housing New Zealand Chief Executive
Date:
2 February 2016
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Version:
Final
Status:
Sign-off
BC Number
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APPENDIX 1: BUSINESS CASE – McLean Flats
Compulsory sign-offs
Role
Name
Sign-off Date
Chief Executive
Glen Sowry
8 March 2016
Chief Financial Officer
Rose Anne McLeod
21 January 2016
Acting GM Asset Development Patrick Dougherty
12 February 2016
Regional Manager
Jackie Pivac
26 January 2016
Tenancy Services
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Associate General Counsel
John Beech
24 November 2015
Grace Chan
5 February 2016
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Manager Procurement
Andrea Morton
9 February 2016
Manager Development
Andrew Showler
21 January 2016
Management
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APPENDIX 1: BUSINESS CASE – McLean Flats
Executive Summary
1.
This paper seeks approval of the Wellington redevelopment project being McLean
Flats at 314 The Terrace, Wellington
.
2.
This project proposal seeks to deliver 34 one bed units to meet the demand
requirements of the Business in terms of the Asset Management Strategy (AMS),
Wel ington Reconfiguration Strategy as well as Ministry for Social Development’s
purchasing strategy and thereby contributes to the provision in reducing the shortage
of one bed unit and accommodation in Wellington.
3.
The McLean Flats project entails:
redevelopment of an existing building and one new building on 1,492 m2
rectangular, sloping Housing New Zealand owned site
construction of 34 one bedroom units, of which 20 are located in or additional to
the existing refurbished building and 14 in the new two-story new fit for purpose
units in blocks of four units100 percent retention by Housing New Zealand
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project approval prior to negotiating the construction contract.
4.
The McLean Flat project provides Housing New Zealand with an opportunity to:
limit redevelopment costs by:
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o completing design, specification and resource consenting in-house, prior
to contracting
o retaining the development site during and after the build – avoiding
lengthy, complex and costly negotiations and transactions involving land
and/or third party sales
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achieve a redevelopment ratio of 1:2 by building 18 new one bed units and
refurbishing 16 existing units and building in earthquake prone building .
add value to the portfolio – the redeveloped site CMV will be $11,665k against the
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existing site CMV of $1,110k
.
increase rental income from the portfolio – potential annual rental income from the
redeveloped site is $703k against potential rental income from the existing site
configuration of $0 due to the building being earthquake prone.
contribute to the objectives, goals and targets of the AMS, MSD purchasing
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strategy and Housing New Zealand Wellington Reconfiguration strategy – by
providing:
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o housing typologies that match current and forecast demand
o continued portfolio distribution balancing across Wellington
5.
Tenancy Services and Property Services are supportive of this development
(Attachment G).
6.
Tax risks are low (Attachment I) and Legal risks are low.
7.
Financial analysis is at Attachment F.
APPENDIX 1: BUSINESS CASE – McLean Flats
8.
The project will be funded by the redevelopment budget which forms part of the
existing FY15/16, FY16/17 and FY 17/18 Budget and aligns with the unit development
costs contained in this budget.
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APPENDIX 1: BUSINESS CASE – McLean Flats
Business context
Strategic fit
9.
In mid-2014, a cross-organizational working group with members from the Asset
Development, Tenancy Services and Property Services groups developed the
Wel ington Reconfiguration Strategy (note this can be made available on request).
Wel ington City had one of Housing New Zealand’s oldest portfolios, which in recent
years had resulted in a number of buildings being identified as having significant
issues, due to water tightness issues and earthquake prone buildings in the main,
leading to a high number of vacant state housing units in Wel ington. Along with this,
very little redevelopment or divestment had been undertaken in the city. These factors
were the main considerations in developing the Reconfiguration Strategy.
10. Through the strategy, Housing New Zealand sought to maintain or slightly increase its
portfolio in Wel ington City, whilst reconfiguring its assets to improve land utilization,
replace aging assets, and obtain a better match to demand. In particular, it was
identified that there was need to increase the number of smal er homes, specially one
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bedroom properties.
11. Overall, the reconfiguration of the Wellington City portfolio would involve divestment,
redevelopment and refurbishment, with a focus on replacing current vacant properties
with warm, dry, safe homes that match tenant needs.
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12. Within the Reconfiguration Strategy, the McLean site is identified as a key
development opportunity. The existing building on site is deemed earthquake prone
and is currently vacant. The strategy proposed that this site had the potential to provide
one bedroom units for high needs tenants due to the site’s proximity to social services.
Demand
13. The Ministry of Social Development (MSD) has released purchasing intentions for
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Wel ington out to 2018 signaling their requirements for an additional 70 one bedroom
units over the next three years to meet demand. The MSD state that whilst they may
purchase above lower quartile rents in order to achieve a suitable outcome for the
applicants, MSD will not purchase over the indicative upper limits for weekly market
rents determined based on median market rents across the country. In Wellington,
these limits are outlined below.
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Table 1
Rental limits
Bedrooms
MSD p/w Rental
McLean Flat
Limits
Market
Rental Appraisal
p/w
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$350 $385-410
2
$450
$460
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$550 $580
4
$650
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14. Over the long-term, the Wellington Community Action Plan (CAP) outlines that there
will be a need to reduce the portfolio size by 145 homes by 2024, predominantly in the
3 bedroom typology. Across the Wellington CAP, Housing New Zealand’s ability to
APPENDIX 1: BUSINESS CASE – McLean Flats
house applicants needing one bedroom properties within our current portfolio
configuration sits at 49 percent. This indicates that there is a need to provide additional
one bedroom units within the portfolio to meet the needs of future applicants. This will
require Housing New Zealand to consider how the portfolio is reconfigured to balance
out the forecasted reductions in demand coupled with a need to increase one bedroom
supply.
15. Within Wellington there are two main social housing providers, Wellington City Council,
which has approximately 2200 units, and Housing New Zealand with 1648 properties.
Across Wellington city, Housing New Zealand’s share equates to 3 percent of all
housing across the city, and 7.6 percent of the residential rental market.
16. The McLean site is located within the Wellington Lambton Precinct. Analysis of this
precinct demonstrates that there is a high level of underutilization occurring within the
portfolio, particularly with regard to the number of tenants currently housed in two
bedroom properties who only require a one bedroom unit. Within the precinct, three-
quarters of all tenants live in one-person households. While there may be instances of
single occupants requiring two bedroom units due to their circumstances, a one
bedroom unit for the most part will provide appropriate accommodation to meet the
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needs of existing tenants.
17. The Wellington Reconfiguration Strategy outlines the need for increased number of
one bedroom properties. Reconfiguring the Wellington City portfolio to provide for
greater one bedroom supply will enable Housing New Zealand to meet these future
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external and internal demand requirements. In this there is clear alignment between
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the Wel ington reconfiguration strategy and MSD purchasing intentions.
18. Wellington City Council is currently undertaking a significant refurbishment programme
of their existing properties which has allocated government funding support, with an
attached requirement that council commit to their involvement in social housing for 25
years. This programme includes the new Arlington project which is a demolition and
rebuild of an existing property. This redevelopment will deliver 35 additional new one
bedroom units (for a total of 66 one bedroom units on site) along with additional two,
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three and four bedroom typologies. The council has not identified any further new
builds; however, they are currently undertaking a strategic review of their social
housing activity.
The case for change
19. Within Wellington, future demand is not the only significant driver for redevelopment
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within the portfolio. The Wel ington portfolio is one of Housing New Zealand’s oldest.
Redevelopment opportunities such as McLean provide Housing New Zealand with a
mechanism through which to actively create additional capacity and enable churn
within the portfolio to address issues associated with an ageing portfolio across other
key assets within the city. This will enable tactical divestment and investment across
the portfolio, supporting the outcomes sought through the Reconfiguration Strategy. In
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turn this strategy aligns to the Asset Management Strategy and the Wellington CAP by
seeking to ensure that homes within the Wel ington portfolio are warm, dry, safe and
meet the needs of tenants by providing appropriate housing typologies in the right
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locations.
20. Through the development of the Wellington Reconfiguration Strategy, analysis was
completed to understand the types of tenants Housing New Zealand housed and their
requirements to access particular social and support services, community and health
facilities, and retail or employment environments. The analysis highlighted the
interconnectedness of tenant characteristics, housing needs (typologies), service and
amenity requirements and the accessibility of these. Many of the support and social
services within Wellington are located in the central business district and surrounds,
these services range from mental health, drug and alcohol, medical and
APPENDIX 1: BUSINESS CASE – McLean Flats
homelessness. Within the area, a proportion of tenants experience a mental health,
drug or other incapacity, that may or may not require some level of support or
intervention from an external agency. Enabling ease of access for tenants to these
services is key to assisting tenants to achieve positive outcomes and remain within
their tenancies. Understanding tenant characteristics and associated requirements can
influence housing typologies and their locations.
21. Input from Tenancy Services (People and Property Group) in developing the
Wel ington Reconfiguration Strategy to understand who Housing New Zealand’s
tenants in Wellington City are, and their requirements was a key component in
identifying appropriate housing typologies and locations in Wellington as part of this
strategy.
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APPENDIX 1: BUSINESS CASE – McLean Flats
Business case proposal
Description of existing site and assets
22. McLean Flats is located at 314 The Terrace. The existing building is circa 1940’s
apartment block of up to 6 stories in height. The building is currently vacant but is
configured as 16x one-bedroom units. The total site area is 1492m2.
23. The site is accessed by pedestrians and vehicles from The Terrace. There is a shared
ROW between Housing New Zealand and VUW (Gordon Wilson Flats), which with the
new site layout and parking option does not need reconfiguring.
Figure 1
McLean Flats – Context
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24. The site is within the ‘Inner Residential Area’. The maximum building height is 10m, the
current building is over 10m in height with the additions being very close to the existing
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silhouette. The new units comply with the 10m height limit and will be set back so that
they will comply with existing daylight angle . If the existing McLean Flats building was
demolished then we would have to comply with the 10m height limit.
25. The design must meet the objectives of the Inner Residential Design Guide, the criteria
for achieving of this Guide has be considered by the Architects during the design
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phase.
26. The site currently has SHA status which allows not only fast tracking of the consenting
process but places ‘enhanced housing affordability’ ahead of strict compliance with the
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RMA. The proposed redevelopment of McLean flats provides enhanced housing
affordability and would there meet the criteria for processing under the SHA act.
27. The District Plan requires a ratio of 1:1 car parks. After an independent assessment of
car parking requirements for one-bedroom housing, an external traffic engineer has
recommended the seven visitor car parking as appropriate for this development. The
location of McLean Flats is close to central city facilities and public transportation
services. The provision of accommodation primarily for single people with higher
needs, means that a low amount of the tenants will not operate a vehicle.
APPENDIX 1: BUSINESS CASE – McLean Flats
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APPENDIX 1: BUSINESS CASE – McLean Flats
Location and Amenity
28. The proposed development site is located at 314 The Terrace, in the Wellington inner
suburb of Te Aro.
29. The location of McLean Flats is an optimal location for social housing due to its
proximity to central city facilities, public transport other community amenities. The site
is surrounded by a residential neighborhood with a diverse mix of activities and people
living in the area.
30. The site is adjacent to the Gordon Wilson Flats, which was purchased by Victoria
University of Wellington (VUW) in 2014. The site is a gateway to the VUW campus and
they currently have a District Plan Change being processed to change the zoning of
this land from Inner Residential to an Institutional Precinct.
31. VUW have applied to demolish the Gordon Wilson Flats, which is currently listed on
the Wel ington City Council (WCC) heritage building. When the flats are demolished,
this will result in improved light, sunlight access and outlook from the McLean site. It is
unknown at this time if VUW will develop the site as student accommodation or 1982
educational spaces.
32. The site has a number of positive attributes that make it well suited for a residential
development. The size and proportions allow for the design and construction of a
complex which with a scale that is ideally suited to one-bedroom units as preferred by
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Housing New Zealand to meet current demand requirements.
Figure 2
Site Location
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Local Property Market
33. The current state of the residential housing market in Wellington Central does not allow
Housing New Zealand the opportunity to purchase suitable properties for its investment
portfolio in this location.
APPENDIX 1: BUSINESS CASE – McLean Flats
34. Based on recent sales data for one-bedroom units in Wellington Central, Colliers have
applied net rates between $6,432 and $7,136 psm or alternatively value ranges from
$294,000 to $366,000. A copy of recent sales comparable is below:
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APPENDIX 1: BUSINESS CASE – McLean Flats
35. Sales volumes for Wellington Central apartments are the highest they have been in the
past three years, with a progressive increase in sales volumes noted over the past 12
months.
36. There are very few development sales of Inner Residential land in the wider Wellington
Area, with the majority of this land being situated significantly further from the CBD
than the subject site.
37. Up until recently, inner city developments have tended to provide a sparse number of
one-bedroom units with the majority to the complexes made up of two to three-
bedroom configurations.
38. The current median house price in the Wellington Region as at August 2015 is
$410,000, compared to a national median sale price of $450,000 for August 2015.
Options Considered
39. The objectives for the feasibility study were to:
Define building configurations that best responded to site characteristics and 1982
neighborhood while creating a good quality housing environment that was safe,
socially inclusive and fully integrated into the community.
Provide one bedroom units options only, which are identified by Housing New Zealand
is in greatest demand in Wellington Central. the Act
Provide accommodation that meets Housing New Zealand asset standards and
design guidelines, with enhanced finishes to the same quality that is currently being
provided in Auckland.
Identify options that comply with Wellington City Council District Plan requirements,
therefore minimizing the potential for a notified resource consent process.
40. The existing McLean flats building is in a state of disrepair and is understood to be at
under
20% of NBS. Engineering advice recommends replacing the brick infills on the north
and south facades, once these areas are addressed the likely rating would be 68% of
NBS, above the HNZ standard of 67%. The existing building could likely be rated
higher after further intrusive testing.
41. One-bedroom configurations are preferred, with units ranging in size from 45-49m2,
increasing to 51m2 for the units in the existing building if the decks are removed.
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42. Each one-bedroom unit aims to achieve the minimum standards set out by the Housing
New Zealand guidelines but the existing building provides some compromise due to
the existing structural grid and floor to ceiling heights. This is however not deemed to
be significant.
43. Various unit configurations were investigated to assess different unit typologies that
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could be accommodated on site. The options analyzed include:
Option 4A: Retain existing building (16 one-bed units) plus 4 new roof tops units, and
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11 new units to the balance of the site. 31x one-bedroom units.
Option 4B: Demolish the existing building and building 31 new units, 28 one-bedroom
and 3x two-bedroom units.
Option 4A+3: Retain existing building (16 one-bed units) plus 4 new roof tops units,
and 13 new units to the balance of the site. 34x one-bedroom units. Including decks.
APPENDIX 1: BUSINESS CASE – McLean Flats
Option 4A+3: No decks to existing: Retain existing building (16 one-bed units) plus 4
new roof tops units and 14 new units to the balance of the site. 34x one-bedroom
units. Decks to new apartments, non to units in the existing building.
44. Note the community room has now been utilized as a residential unit.
Recommended Option
45. Option 4A+3 (34x one-bedroom units with decks to the new building only) was
preferred as it offered the best financial return and also meets Housing New Zealand
demand for one-bedroom units. A comparison of the feasibility, is assessed under the
section
Financial Feasibility. The option to demolish and rebuild was by far the most
uneconomic solution.
46. The existing McLean Flats building is not a listed heritage building with Wellington City
Council, but it does have townscape and architectural qualities in terms of what it
represents as a social housing project of its time and its architectural character and art
deco qualities.
47. McLean Flats is located on an elevated sloping site on the western edge of Te Aro
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Basin. The elevated nature of the site means the existing building can be seen from a
number of locations within the city basin and the surrounding streetscape. This
provides opportunities for an increased profile and identity for the development.
48. All units are dual aspect offering views in two directions and provide strong visual
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connections within the site and beyond which can assist with minimizing social isolation
and provides good quality living environment with good daylight, ventilation and a
sense of space.
49. The community garden is a terraced area that links the upper ground courtyard with the
Stair 3 Lobby entry to the west, where there are areas for a community garden and fruit
trees for tenants to be able to grow food.
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Figure 3
Plan of Proposed Development
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Figure 4
McLean Flats – Proposed Design
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APPENDIX 1: BUSINESS CASE – McLean Flats
Impact on Tenants
50. The TLO team have successfully relocated all tenants that were previously in
residence on the site.
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APPENDIX 1: BUSINESS CASE – McLean Flats
Financial Feasibility
Valuations
51. Colliers International, registered property valuers, have considered the existing assets
and the potential development to determine an estimated value. Their full valuation
report is appended to the business case (Attachment E).
52. Colliers International have recently assessed the current market valuation of McLean
Flats at 314 The Terrace, at $1,276,500 including GST. This includes the underlying
market value and improvements.
53. Colliers International have been provided the typical typologies designed for one-
bedroom apartments McLean Flats and have determined the average value for these
properties.
Table 2
As-if Complete finished valuations - Average
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TYPICAL HOUSE TYPE
ESTIMATED MARKET VALUE
MARKET RENTAL ASSESSMENT
1 Bedroom Unit (4A+3 no deck)
$320,824
$385‐$400
1 Bedroom Unit (4A+3 incl.
$334,853
$390‐$410
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deck)
Car parks
$40,000
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Construction Costs
54. The construction costs currently allow to strengthen the existing building to 100% NBS.
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It is not likely that the proposed upgrade of the building would in itself trigger a legal
requirement to strengthen the building beyond the 68% achieved by removal of the
brick infills because there is no change of use and the building is not being added to
significantly. However for the purposes of the current feasibility study it has been
assumed that HNZ would wish to take a long term view of the property asset and,
noting that the building is being ‘renewed’ in all other respects, that strengthening of
the building to 100% NBS is a more appropriate long term approach. Should Housing
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New Zealand wish to consider strengthening to something less than 100% then the
strengthening options and cost savings can be assessed further during the concept
design stage.
55. Construction costs have been estimated by Rider Levett Bucknall (RLB) based on an
outline specification, design assumptions from Athfield Architects and Dunning
Thornton engineers. It is important to note that the estimates are based on
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considerable assumptions given the limited design information available at this early
stage in the design lifecycle. Accurate construction drawings and detailed
specifications are needed to precisely determine construction costs.
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56. The total construction estimate for the 4A+3, exclusive of decks to existing building
scheme is $7,212,140 excluding land, fees and contingency. This estimate is based on
a gross floor area of 2540m2 and a construction rate of approximately $2,800/m2.
57. Build costs on similar projects in Wel ington have ranged from $2,400m2 – 3,200m2.
58. Estimates of professional’s fees and Local Government Fees and charges have been
included sourced from similar scale projects.
APPENDIX 1: BUSINESS CASE – McLean Flats
59. The entire development for 4A+3, exclusive of decks is expected to cost $11,503,180
million including GST, and including the land value.
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60.
9(2)(i)
sis is
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Procurement Options
61. The procurement models described below have been considered for the development
of McLean Flats.
ID
Name
Description
1
Design & Construct Housing New Zealand undertakes the development and owns
all the units on completion.
Housing New Zealand retains a design team to partially develop
the scheme design. This developed design is tendered out with
a Requirements Specification, and the contractor designs and
builds to those requirements.
2
Design & Construct A variant of the above option, the client’s design team is
– Novated
novated to the contractor at the completion of the 30% design.
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The contractor bids to complete the design and construction
using the client’s design team
3
Design-bid-build
Housing New Zealand undertakes the development and owns
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all the units on completion.
Housing New Zealand retains a design team to prepare full
design documentation and tenders the finished design to a
contractor.
4
Developer-led
Housing New Zealand define their requirements for the site
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buyback
including type and numbers of stock, specification and quality
expectations. Housing New Zealand then sells the parcel of
land to a developer and buys back a pre-agreed number of
units (in this case, all units) at completion of construction at a
pre-agreed market rate. A variant on this model is for Housing
New Zealand to provide the land free of charge.
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This option could also be delivered by a well-funded builder.
This option was rejected as being more expensive due to the
finance charge and developer overheads associated with the
developer holding the project.
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5
Develop or investor Housing New Zealand define their requirements for the site
-led leaseback
including type and numbers of stock, specification and quality
expectations. Housing New Zealand then sells the parcel of
land to a developer and leases back a pre-agreed number of
units (in this case all units) at completion of construction at a
pre-agreed market rate. A variant on this model is for Housing
New Zealand to provide the land free of charge.
In this scenario the developer would be unable to convert from
social housing to other uses in the future, limiting the potential
upside for the developer on expiry of the leaseback period.
This option was rejected as being more expensive due to the
finance charge and developer overheads associated with the
developer holding the project.
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6
PPP
Housing New Zealand enters into a hybrid model with a
developer or social housing provider, or a combination, on a
shared risk and return basis.
McLean Flats is too small to consider the involvement of a third
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party housing provider.
This option was rejected as being more expensive compared
with a tendered approach due to the overheads associated with
establishing and managing the PPP structure. There may also
be finance charges and associated with the developer or
provider, depending on the PPP model used.
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Evaluation of Delivery options.
62. The following requirements were adopted based on our understanding of the project
characteristics and HNZ requirements:
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ID
Criteria
Description
1
Value for Money, Overall financial performance. The forecast cost of delivery for the
considering
procurement method taking into account such things as the extent
of market competitive pricing, the degree to which Housing New
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The extent to which the procurement method can provide cost
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2
Overall price risks Includes consideration of how well the procurement model deals
with cost risks such as in-ground risk, unforeseen issues, existing
buildings/structure, interface risks and the associated risk of time-
related Contract Variations.
APPENDIX 1: BUSINESS CASE – McLean Flats
3
Quality outcomes How well does the procurement method allow Housing New
– design and
Zealand to control the design outcomes such as amenities, shared
construction
services, space and light? How well does the procurement
method allow Housing New Zealand to control the quality of
construction for the specified design?
4
Time to
The extent to which the procurement method can shorten design
completion and
and construction durations.
programme risk
Includes the extent to which procurement options may increase (or
decrease) timeframes due to Housing New Zealand procurement
and other internal processes.
5
Contractor
Contractor capacity, availability and interest to bid the project
capacity,
under the procurement model proposed.
availability and
1982
interest
the Act
Evaluation
Criteria
1 – D&C
2 – D&C novated
3 – Design-bid-build
1.
Value for
L
L
H
under
Money
Unable to provide cost
Unable to provide cost
Detailed design and
certainty regarding
certainty regarding
thorough investigations
refurbishment due to
refurbishment due to
should provide a well-
unknowns..
unknowns
coordinated set of
drawings. Contractor
Information unable to provide
innovation through design
phase
2.
Price risk
M
M
H
Released
Unable to provide cost
Unable to provide cost
Any drawing errors
certainty for
certainty for refurbished
resulting in variations will
refurbished
apartments (Approx 50%)
be at the Client’s cost.
Official
apartments (Approx
Balance of risk between
50%)
Contractor and Client.
APPENDIX 1: BUSINESS CASE – McLean Flats
3.
Quality
M
M
H
No Contractor input
No Contractor input into
Client can have direct
into the design or
the design or planning of
control over the design
planning of the project the project as they are not
and quality
as they are not
appointed during the
appointed during the
design stage.
design stage.
3. Time
H
H
M
Shorter duration due
Shorter duration due to
Typically the traditional
to overlap of design/
overlap of design/
method is slower than
construct.
construct.
design-build
1982
4.
Market
L
L
H
interest
Low interest due to
Low interest due to risks Minimal risk to Contractor.
risks associated with
associated with this
Act
this approach.
approach.
the
TOTAL SCORE
9
9
14
H=3, M=2, L=1
under
63. Due to the combination of refurbishment and new build units, the preferred
procurement methodology for delivery is through traditional design-bid-build process.
This enables the Contractor to price based on a fully coordinated set of detailed design
drawings. With the total project cost exceeding $10m, Housing New Zealand will be
required to openly advertise the procurement via the Government Tendering service
(GETS). The design-bid-build procurement option provides the most competitive price
Information
and least risk option for the redevelopment of McLean Flats. There are some
advantages in retaining the current design team as the knowledge of the site and
project be retained. A two stage procurement process to test the markets interest and
shorten the final negotiation period would be the least time consuming process.
64. Interviews were conducted with five Wellington construction companies of varying
sizes but all with a history and capability to deliver a building of this scale and nature.
Released
All contractors are very interested in the project regardless of delivery and procurement
model (i.e. traditional or design and build).
Official
65. There is a forecast shortage of construction projects for the Wellington Market in 2016.
The timing of this project is likely to experience favorable construction market in 2016.
Specific themes from the contractor interviews were as follows:
66. A number of them have been involved in tender process with Housing New Zealand
before that have not proceeded, therefore they would require assurances that the
projects were going to proceed before investing in a tender process.
67. There are both advantages and disadvantages in combining this project with others
development projects being considered. There is advantages to being to offer greater
APPENDIX 1: BUSINESS CASE – McLean Flats
continuity of work to the contractor and subcontractors which might attract marginally
better pricing and priority service. The disadvantage is that the scale of the combined
projects may preclude smaller contractors from being able to deliver sites concurrently
introducing risk. There would be no P & G savings as the sites are geographically
separated.
Financial Feasibility
68. The preliminary financial development feasibility is shown in the table below. A more
detailed assessment of the financial Impact to Housing New Zealand in attached in
Attachment F.
69. It is proposed that Housing New Zealand retains 100% of the completed units to meet
current Housing New Zealand demands for one-bedroom units in this location.
Table 3
Development Feasibility - based on Traditional Procurement Approach (No decks)
McLean Block, The Terrace,
Rev 1 20.01.16
Scheme 4A + Retain Existing building NO DECKS +4
Wellington
ROOF + 10 New Units PLUS 3 new units to rear with
decks
1982
Site Redevelopment
HNZ 100% Owned with HNZ as Developer
Valuation
HNZ
HNZC
No
Value
Total
Refurbish existing McLean Block ‐ 1 Bed units
16
$
5
,584,000
Community room (could also be fitted out as apartment)
1
$
3
03,000
the Act
New 1 Bed units above existing building
4
$
1
,316,000
New 1 Bed units
10
$
3,
258,000
New rear units
3
$ 924,000
Carparking
7
$
40,
000 $
2
80,000
Total (Average)
34
$
3
34,853 $ 1
1,665,000
$ 1
1,665,000
Total Value on Completion
$ 1
1,665,000
Construction
No.
Area
Rate p.s.m.
Cost
Total
A1 ‐ Existing Building Structural strengthening
1
1629
$
7
28 $
1
,185,912 $
1
,185,912
under
A3 ‐ Existing building roofing and recladding
1
1629
$
2
62
$
4
26,798 $
4
26,798
A2 ‐ New units ‐ Structure
1
911
$
1
,067
$
9
72,037 $
9
72,037
A4 ‐ New units ‐ roof and cladding
1
911
$
3
57
$
3
25,227 $
3
25,227
A5 ‐ Lift (In 1 No. Existing)
1
1629
$
1
06
$
1
72,674 $
1
72,674
A6 ‐ Existing apartment fitout (No.16)
1
801
$
1,
720 $
1
,377,720 $
1
,377,720
New apartment fitout (no.18)
1
820
$
1,
630 $
1
,336,600 $
1
,336,600
Circulation area fitout
1
522
$
1,
236
$
6
45,192 $
6
45,192
Additional parking cost
$
1
00,000 $
1
00,000
Community room
1
52
$
1,
865 $
9
6,980 $
9
6,980
Net saving from deletion of decks on existing Information
building levels 1 to 5 (excluding community
room)
16
no
$
(
3,000) $
(
48,000)
Site works and Services
1
L/S
$
4
71,000
On Site Stormwater Retention
$
‐
Site Works & landscaping
1
$
1
50,000 $
1
50,000 $
7
,212,140
Consent and Consultants
Professional Fees
12.5%
$
7,
212,140 $
9
01,518
Released
Council Consent fees (building and resource)
1
3.0%
$
7
,212,140 $
2
16,364
Dev Contributions Nett
$
60
,000
Place making‐ Comms
Telecom connection charge
17
$
1
,000 $
1
7,000
Official
Water connection charges
17
incl
$
‐
$
‐
$
1
,194,882
GST
GST on Costs of Houses Retained
100% $ 8,
407,022
$
1
,261,053 $
1
,261,053
Overheads & Risk
9(2)(i)
Holding Costs
excluded
Funding Costs
excluded
Decanting Costs
1
$
‐
$
7
25,106
TOTAL DEVELOPMENT COST Excluding Land
$ 1
0,393,181
LAND at CMV (GST Excl)
$
1
,110,000
TOTAL DEVELOPMENT COST Including Land
$ 1
1,503,181
TOTAL PROJECT MARGIN
$
16
1,819
1.4%
APPENDIX 1: BUSINESS CASE – McLean Flats
70. Please note that the above feasibilities do not account for inflation or cost escalation of
which the Finance memo (Attachment F) does allow for, in accordance with the
Investment Manual. Finance suggest funding is therefore sought for the inflated
amount of $10,771k. Similarly the completion value in the above feasibility is uninflated
whereas the value in the Finance memo is inflated.
Financial Analysis
71. The financial feasibility calculations based on RLB estimates and Colliers valuations
are summarized below.
9(2)(i)
1982
the Act
under
73. Decks could be added to the no deck option by forming them outside of the existing
building envelope. This would align with Housing New Zealand requirements to provide
decks and almost be cost neutral (i.e. cost offset by deck added value), however the
provision of external decks to the existing building will be a challenge architecturally,
given the Art Deco style of the existing building. Athfield Architects, the company
contracted via the procurement process in 2014, have stated that the architectural
integrity would be severely compromised and they are opposed to external decks on
Information
the existing building. Based on this advice, this option was not pursued further.
74. After further consultation, the preferred option is confirmed as 4A+3, consisting of a
total of 34 units, with no decks to the existing units.
Risk analysis
Released
75. The main business and service risks that might create, enhance, prevent, degrade,
accelerate or delay the achievement of the investment objectives are identified in
Attachment H.
Official
76. It is deemed that all risks which have been identified are at acceptable levels and can
be managed.
Tax implications
77. This project does not raise any development activity tax implications (Attachment I).
APPENDIX 1: BUSINESS CASE – McLean Flats
Legal and regulatory implications
78. Legal have advised that the proposed redevelopment does not raise any unusual legal
implications (Attachment K) given:
this is a site which Housing New Zealand has owned;
it is to be retained throughout the build process;
Housing New Zealand intends to retain the end product for rental housing
purposes;
the build will be on one of Housing New Zealand’s approved build templates; and
the project is a “strategic fit”.
Procurement
79. The sourcing of the team to deliver the McLean project commenced with the
appointment of Athfield Architects in January 2015, following an RFP process 1982
undertaken in late 2014. Further procurement processes will be required to appoint the
balance of the design team (such as traffic planners, if required for the unusual site), a
development /project management partner to act as Housing New Zealand’s agent
(Housing New Zealand does not intend to manage this in house for this project) and a
procurement process to select and contract the contractor to deliver the project.
the Act
80. There are no Housing New Zealand panels in place for the Wel ington market and
Housing New Zealand has undertaken no pre-qualification processes. Housing New
Zealand has connected with Government sector agencies with active construction
programmes underway, to leverage the available market analytics and consider pre-
qualification processes in order to expedite the sourcing processes, where possible.
The proposed processes are outlined in Attachment J.
under
Communications
81. Housing New Zealand has ongoing, well established relationships with the
stakeholders and community surrounding this site with whom there has been an
ongoing commitment that we will be open and transparent about our plans.
82. A communications and engagement plan will be drafted to support the outcome from
Information
this paper.
Released
Official
APPENDIX 1: BUSINESS CASE – McLean Flats
Project implementation
83. The project will be run over one continuous stage – all the new supply housing on the
site will be constructed and delivered at the same time. Project delivery is expected in
mid 2017. Key project milestones indicators are set out below.
Table 5
Key Milestones and Estimated Delivery Programme
KEY MILESTONES
ESTIMATED DATES
Stakeholder Engagement including VUW
Second quarter 2016
Resource Consent Lodgment
Third Quarter 2016
Resource Consent Approved
Fourth Quarter 2016
Contractor Engaged
Fourth Quarter 2016
1982
Units Completed
Second Quarter 2018
the Act
84. Upon approval of this business case the following activities will occur:
Asset Development Group will begin discussions with Wellington City Council in order
to prepare a revised resource consent application for lodgment mid next year.
A communications and stakeholder engagement plan will be prepared. Housing New
Zealand will engage with affected stakeholders and inform them of our intentions.
Once consents are obtained, construction contacts will be tendered. Contract
under
execution will be entered into based on the approvals sought in this business case.
Updates will be provided to the Board as key milestones are achieved.
85. Andrew Showler, Manager Development Management team, will lead the McLean
Flats project.
Information
Attachments:
Attachment A
Architects Design Report
Attachment B
Final Design Option + new parking layout option.
Attachment C
Planning Memo
Attachment D
Draft Programme
Released
Attachment E
Valuation Report
Attachment F
Financial Analysis
Attachment G
Property and Tenancy Services memo
Attachment H
Risk Analysis
Official
Attachment I
Tax Implications
Attachment J
Procurement Memo
Attachment K
Legal Implications
Attachment L
Demand and Portfolio Review
