Auckland, March 12, 2020
A key but often underestimated consideration for developers is the cost and impact of Development Contributions (DCs).
These costs are confirmed by the City Council after lodgement of Resource Consent; however, getting a good idea of the likely cost of Development Contributions prior to lodgement of resource consent is vital to assessing the profitability of your project.
For land bankers, understanding future DC policy may significantly change the strategy as far as the timing for lodgement of resource consent is concerned.
DCs are levies imposed by local councils on a developer and are raised as contribution toward the cost required to upgrade and maintain council and public infrastructure within a designated area.
The amount can vary according to the infrastructure requirements of the area, as well as the type and size of the proposed development being carried out (measured by the increased number of residential dwellings or Household Unit Equivalents — HUEs).
In Auckland, developers looking to complete a subdivision typically incur DCs of between $27,000 – $33,000 per lot, depending on location and the demand on infrastructure in the area.
This is in addition to private infrastructure works within the subdivision which are funded by the developer and is a common condition in any resource consent.
Levin, governed by the Horowhenua District Council, has no DC’s; all infrastructure costs are effectively subsidised by rate payers. This strategy was adopted to incentivise development in the area.
The purpose of DCs is to recover from developers a fair, equitable, and proportionate part of the total cost of capital expenditure necessary to service growth over the long term. So, the standard approach whereby councils’ charge DC’s (as a percentage of total cost) is not altogether wrong.
But the implementation of this policy can have a significant impact on the supply of new housing.
Increasing DCs to a level that fully recovers costs could have serious consequences for home buyers, as developers can simply add it onto their section price, pushing house prices further out of reach.
What economists say
Councils generally bank on the developer being willing to wear the cost or pass it on to the landowner or the house buyer. But economists have argued that house prices are at maximum affordability levels; developers won’t be able to keep passing these costs on to buyers. Instead, they will be building the cost of DCs into their feasibility studies, causing them to pay less for developable land in order to maintain margin. This will result in lower profits for the existing landowners, rather than increased house prices for the final buyers.
For developers buying bare land, increases to DC levies pose a significant risk.
For example, between 2016-2017, and 2019-2020, DCs for Rotokauri catchment in Hamilton increased from approximately $30,000 for a standard residential lot, to $70,000 – a 130% increase. To put that into context, a small 20 Lot subdivision that would incur DCs of $600,000 in 2016/17, would cost $1,400,000 today. It is easy to see that such a dramatic rise can make a number of developments uneconomic.
Another important factor to consider is that DCs can rise during the course of a four- or five-year project. For land bankers, understanding current and future policy is key.
For developers buying unconsented land, the message is apparent – build in appropriate allowance for DCs and allow for unforeseen increases in cost that may arise as a result of council changing the DC policy.
Parash Sarma is Client Services Director, ASAP Finance Limited based in Auckland. He can be contacted on 021-864730. Email: email@example.com
ASAP Finance Limited is a Sponsor of the Thirteenth Annual Indian Newslink Business Awards 2020.