Category Archives: Pro Experts

Hawke’s Bay’s leading professional service advisers & leaders

The Value of Hawke’s Bay Property

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In November last year the NZ residential property market was running hot, as it was locally, evidenced from ever increasing values, the peak of which appeared to be in the latter part of last year. One could only wonder how long the upward trend could be sustained especially as there had been no letup in buyer fervour since the end of the first lock-down in 2020. To be frank some of the value levels achieved were simply eye watering.

Market conditions have a direct bearing on the property’s market value and Williams’ Harvey (WH) accumulates a library of research from numerous commentaries and views of economic/research analysts to build a ‘big picture’ oversight.

Looking at our most recent data sets, the year to date (YTD) Hawke’s Bay volume of sales is down 34.7% from previous month and 33.3% from previous year. It is also well reported that there is plenty supply of houses for sale and yet the volume of sales in Hawke’s Bay is the lowest for the first six months of a year recorded for over 20 years. Furthermore, the amount of time a property is on the market has also increased to 66 days, the highest recorded time since January 2009.

So, with volume down, time on the market to sell increasing and plenty of stock tilting the market towards the buyer, it is not surprising that we are starting to see some downward pressure on house values. Consequently, vendor’s are starting to realise that they have got to accept adjusted values. At the time of writing this article ANZ had also revised its forecast for how far house values would fall, increasing the predicted drop from 12% to 15% from previously.

This adjustment was attributed to the prediction that economists are now flagging inflation to peak at higher rates than first predicted and become less transitory and more persistent in duration. In response the RBNZ has raised the OCR 150 basis points (bp) since February 2022. The most recent MPS announcement (13 July) saw this go up 150 bps to give an OCR of 2.5%. Whilst raising the OCR was predicted, what has been widely unexpected was just how aggressive the MPS forecast track for the OCR would be with another 50bp increase also predicted in August. So whilst NZ joins most other countries as it transits out of its pandemic response phase, the post pandemic ‘new normal’ is still going to be economically tricky for the foreseeable future. The net result being downward pressure on house values.

Since the beginning of the year, we have been put on notice that there were significant head winds that would cool the property market, and these appear to be coming into play However, given the exponential growth experienced by the property market in the last 24 months this also needs to be seen with some perspective. For example, in February 2020, the month before the impacts of the Covid-19 pandemic hit the property market the Hawke’s Bay Median Sale Price (MSP) was $516,000.

The market exploded and peaked in November 2021 when the Hawke’s Bay MSP hit $830,000. The latest MSP data we have for June 2022 is recording a decrease of nearly 17% since November 2021, however, there has been an overall 33% increase in the Hawke’s Bay MSP since the beginning of the pandemic.

NZ continues to operate in a pandemic response environment as the highly contagious Omicron variant runs its course through the population. As signalled, this has and will continue to impact productivity as human resourcing disruptions, a tight labour market and supply constraint issues become part of day to day business management. Also, as signalled, inflation both at home and overseas is the predominant economic nemesis.

These inflationary pressures are further exacerbated by wider economic fallout from the current geopolitical crisis stemming from events in the Ukraine and the flow on effects from rising fuel costs and economic sanctions that will have a direct impact on global financial markets and supply chains.

Subsequently, we are currently seeing a slow down with good supply yet low volume of sales, longer periods to sell and the subsequent easing of values. This is a comparable trend being seen throughout many NZ regions, though it’s important to put this in perspective and remember that before the pandemic MSPs were approximately 33% lower, so even if the market does experience a 15% value decrease, values still remain higher than they did two years ago.

Korero in the Workplace: The Importance of Mental Wellbeing as a Business Asset

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Mental Health Awareness Week runs from 26 September to 2 October 2022.

In 2021, the theme of Awareness Week was “take time to kōrero”, which encouraged connection through conversation, and promoted openness about our mental wellbeing.

For employers and employees, it’s important to understand that mental health plays a significant role in the workplace. For businesses, the mental wellbeing of their teams is a great asset. Research shows that businesses who invest in the mental health of their staff reap the benefits of increased productivity and overall business efficiency. But mental health is tricky to isolate. Almost half of all New Zealanders will be categorised as struggling with a mental illness at some stage in their lives, and what is considered as encouraging of mental wellbeing is different for everyone. Setting rigid guidelines in the workplace may not be as effective as fostering a supportive work environment overall – one which encourages employees to kōrero openly about their mental health. Encouraging mental wellbeing is not just a sentiment – it is the law.

The focus on mental wellbeing continues to improve in New Zealand’s legislation, with a variety of statutes designed to facilitate the improvement of mental wellbeing in the workplace.

Some examples include:

■ The New Zealand Bill of Rights Act 1990;

■ The Privacy Act 1993; and

■ The Employment Relations Act 2000.

A significant example of fostering mental health in employment law includes the Human Rights Act 1993, which creates an obligation for employers to meet the needs of employees who struggle with disability. These are called “workplace accommodations” and can be useful for employees who may have ideas about how businesses can better accommodate mental wellbeing. Another example is the duty of care which obligates employers to protect, as far as reasonably practicable, the health and safety of their workers under the Health and Safety at Work Act 2015. “Health” in this context is defined as both physical and mental health. Finally, under the ordinary legal rules of sick leave, employees are entitled to use their annual sick leave for mental wellbeing purposes.

The regime for mental health sick leave operates exactly as it would for any other kind of sick leave from the workplace. For example, should an employee opt to take three consecutive days of sick leave for mental health, the employer is entitled to request a doctor’s certificate in support.

So how can a business go about using mental wellbeing as a valuable tool for their company? The Mental Health Foundation provides great resources for businesses wanting to promote mental wellbeing in the workplace. The most consistent theme is that employers and employees are in communication with one another. “Connect”, “give” and “take notice” are among some of the core themes encouraged by the Foundation.

Another key theme in research around workplace mental prosperity is flexibility. For example, the Employment Relations Act 2000 includes the right to request flexible working arrangements, which may be useful when assisting an employee to shape their workday in a way that encourages their mental health. There is also great information available for workplace mental health standards at employment.govt.nz.

Employers are best to keep in mind that sometimes it is the smallest gestures that make a big difference for the team. It might just be where a team member’s desk is located or the fact they lack clarity on part of their role, maybe they want to start a little earlier in the day so they can get off earlier in the afternoon to pick up the kids. Be creative and be ready to talk.

Bramwell Bate looks forward to celebrating mental wellbeing not just in September but throughout the year. Collectively, we recognise the value of mental wellbeing as an asset of our firm, and we encourage our clients and our colleagues to consider how you may be able to promote mental wellbeing in your lives and businesses. Our employment team – Christine Symes and Tayla Westman – are happy to help and provide advice on flexible working agreements, ensuring your sick leave and family violence leave policies are up to date and fit for purpose, and that you have policies in place for data protection and privacy when team members are working remotely.

Health is the new wealth

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Recently I was asked to speak at a Wealth Conference. An unusual platform for a health & fitness professional to find themselves on. Or is it?

Building wealth is important yes – but so is the having the health to enjoy it.

There are many reports and studies on multiple different health topics that would indicate that we are not ready to enjoy our health.

One example is a Deloitte report recently published that confirms that the cost of lack of movement to the NZ tax payer is: $2.3billion.

“We have this illusion that we are a sporting nation, so an active nation, the truth is we are not, we’re a sport-watching nation,” said Exercise New Zealand CEO Richard Beddie.

This comment surprised me. However, following some more research, I agree with it. The World Health Organisation activity guidelines are an hour a day for kids and 150 minutes of moderate to vigorous exercise a week or around 20 minutes a day for everyone else. The thing is, 93% of our kids and over 40% of adults don’t hit these targets, costing our health system $530 million a year.

The Deloitte report calculates if the Government made a once-in-a-lifetime investment of $2500 per inactive person to get them active, it would be made back in less than 12 months. And it’s projected that over 30 years, that $2500 investment would actually benefit the Government by $12,500 per person in healthcare savings.

How does a typical week look to you? Are you meeting the WHO guidelines? Does your organisation encourage you to stay active and look after your health as well as your safety?

Clearly personal responsibility is a factor but employers must ‘manage’ stress in the work place and Southern Cross surveys indicate it is sadly climbing rapidly.

Assets – Liabilities = Net Worth

As companies and individuals we are quick to manage our net worth and slow to manage our health.

We have clear metrics in place to manage our wealth, and we put in a great amount of time and effort to grow our wealth. What if we managed our health like we managed our wealth.

Would we be ready to enjoy our health? Here are some simple metrics you can put in place. Check in with yourself and rate yourself on a scale of 1-10 against the seven Peak Fitness Pillars of Health and Fitness below.

 

 

1 = Feeling poor and off your game

10 = Feeling great and ready to play

If your numbers are on the low side you need to put some more time in to building your health so that you can enjoy your wealth.

Sleep – Did you get enough?

Nutrition – Have you eaten well?

Hydration – Have you drunk enough water?

Movement – How much have you done?

Energy – How much have you got?

Body – How does it feel? Aches, pains, niggles?

Stress – How high or low is it?

As Paul Chek says “sooner or later health will become your number one priority”. I’d strongly recommend that you have a clear strategy and plan in place for your personal and company health so that you are not playing catch up with your health investment in the future.

The balance between health and wealth is a challenging one. Having the wealth to enjoy your health is important. However, without good health you will never get to enjoy your wealth.

Invest wisely.

Could your team be doing better?

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Teams are a powerful asset for any organisation. However, unlike a sports team, we rarely spend time practicing being a team. While most organisations can acknowledge the positive impact of an effective team, particularly in leadership, few create a plan to make this happen. Looking at how your team is assembled and structured, how it functions, its strengths, blind spots and developmental requirements could be the single best thing you do for the success of your business this year.

Where to start 

If you are wanting to build a high performing team, its members need to know that this is their “primary team” and not a secondary one. Leaders often think their own team of direct reports is their primary team. However, their commitment and aligned focus must be to the primary team and its direction, goals, and strategy. This mindset will facilitate the breaking down of silos in an organisation.

It is also important to consider the size of the team. While leadership collaborations like to be inclusive, they can be too big to be effective. A team with more than ten members can suffer from efficiency, effectiveness and alignment problems, whereas smaller groups will ensure strong relationships, healthy debate and actioned decisions.

There is no algorithm for putting different people together in the complex roles required in a top team, so design and development are critical. If the CEO can successfully play the role of developer, the leadership team will function more effectively and members will learn to think differently, both individually and together.

Understanding the right mix of people in terms of skills, experience and personality is key to ensuring a productive team. Getting that wrong, even by just one individual, can have far reaching impacts. Too often, we promote people who are technically strong in their own roles but put little thought into a team’s collective capability.

Get the diagnosis right To improve performance, self-awareness is a must have for a team to develop effectively and master its strengths, potential fracture lines and know its blind spots and gaps, both individually and collectively. Likewise, the CEO/team leader needs to understand what makes members of the team tick individually and what makes them work (or not) as a group and talk openly about this to facilitate introspection and provide insights into behaviour, shared responses under pressure and unconscious bias.

Use of a diagnostic tool is helpful here. Options include assessment tools such as personality or a team 360 survey to provide a map and understanding of strengths and performance improvement areas.

Commonality versus diversity

Truly understanding the skills and characteristics needed for a cohesive team will ensure a balance of traits – too much commonality is not a good thing.

Diversity of thinking with different “hats’’ around the table is important. This will ensure that members complement one another and, when done well, it will create a high functioning team.

Teams typically focus on functional roles (our technical role as defined by the position title) but our “psychological roles” can be more impactful. This is the informal roles individuals gravitate towards based on their personality e.g. focus on results versus relationships, pragmatism or process versus innovation and change. A high preforming team has a balance of people in these roles. Too much of the same thing and the team can miss leading the organisation in the right direction.

Keys for a high performing team

Research by leadership specialists Winsborough found key characteristics that effective leadership teams have in common.

These included:

1: Focus – Having a shared and clear brief of objective and goals. As such, spend time and energy to establish vision and set the focus.

2: Development – Having a conscious reflection on the team’s performance and investing time in development and improvement to improving team dynamics.

3: Norms and decision making – Having a clear process for decisions with no hidden agendas – consensus among members is achieved via constructive debate.

4: Trust and healthy conflict – Teams that trust their colleagues and have some conflict is healthy. Often teams are conflict averse, but the ability to be transparent, give constructive feedback and address team dynamics is crucial for success. A good team will give opinions, debate issues and hold each other to account. Lack of conflict can lead to artificial harmony. In Patrick Lencioni’s work “The Five Dysfunctions of a Team”, a lack of conflict is found to be just as damaging on team morale as harsh and direct conflict. Remember, good conflict requires a foundation of trust and if this is lacking in your team, developing trust needs to be your starting point.

5: Contribution to team – By participating, holding up their end of the role and adding value, members can create a more effective leadership team. Lencioni refers to this as commitment followed by accountability.

Summary

Building and developing a team is a process that never ends. It requires ongoing commitment and investment of time and energy, but the advantages are great and the rewards are plentiful. If you want to know more about how to map and develop your team, please contact Andrea Stevenson. andrea.stevenson@bakertillysr.nz

The Halfway Mark: Asset Class Market Update

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The July edition of the Colliers monthly property research report reflects the halfway mark for 2022 and presents a timely opportunity for us to provide an update on market conditions across multiple asset classes both of what is being experienced nationally but also some of the local activity that has taken place.

Retail

The retail sector has had its fair share of challenges over the last couple of years, but the opening of closed borders at the end of the month provides some more positive expectations for retailers ahead. The low unemployment rate has been a major tailwind for the sector, but the rising cost of living, debt cost increases and a slowing residential sector provide headwinds that will continue to impact retailing over the short-term.

It is worth noting that despite low consumer confidence surveys, there are bright spots. From an online spending perspective, Q1 2022 was a record, with the latest NZPost report showing an exceptionally strong quarterly result with $2.2 billion of spending occurring, a rise of 86% from Q1 2020 (a record 77% was with NZ-based businesses).

This highlights that people are still willing to spend while property purchasing in the retail sector and leasing activity remains buoyant with Chemist Warehouse leasing new space at 300 St Aubyn Street Hastings, and No 1 Shoes taking on a larger premises at the ex Rebel Sport at 246 Hastings Street Napier. Curtain Studio Hastings recently sold off market at a yield of 5.5%.

Office

The debate surrounding back to office work, remote working and hybrid working continues to take place. While trends offshore provide some insights, caution is advised on their use outside of the origin location.

There remains a desire for good quality office space has risen and this will add pressure to what is ultimately a limited resource.

New Zealand’s adoption of environmental standards, while improving over the years, is arguably still well behind other countries’ approaches. With an ever-increasing focus on the environment and a lack of standardised accreditation in the sector, there is likely to be a number of ongoing challenges.

Quality offices that have been established over the last six months include the 2nd stage of retail and commercial office space at Joll Road Havelock North, which is the new home for Colliers Hawke’s Bay as well as Forsyth Barr and RTA studio Architects. 101 Queen Street East is getting close to completion in Hastings, with Westpac now open and Ask Your Team relocating from Havelock North to a new premises within this development leasing over 800m. of new office. Napier office vacancies remain tight with limited available stock and no A grade space available.

Industrial

Rental growth in the industrial sector will be one of the standout trends for 2022 and 2023, as limited supply and ongoing demand continues to impact the sector. Projections of 3% to 4% p.a. prime rental growth rates are likely to be tested, and while limited evidence is available at this stage, anecdotal evidence suggests higher percentage rates should be anticipated, especially for the most sought-after spots. On the horizon is more industrial floor space, which may assist alleviate some occupancy constraints, but not all pressures.

Irongate, which was planned to take about 20 years to be at capacity, has quickly got close to being fully occupied or developed, with Sun Fruit commencing construction of a new coolstore and another large player in the apple industry looking to construct a new coolstore within Irongate also. T&G $100M packhouse in Whakatu is well under way which is believed to be the ‘biggest in the southern hemisphere. The recent sale of 51 Edmundson Street Onekawa leased to move logistics sold at deadline, at a yield of 4.7%, or $5.25M with multiple parties all very close in price.

Is the housing crisis over? How effective is the fast track planning process?

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In our April 2022 article we talked about housing supply and how the effective use of fast-track planning processes under the RMA could assist us, while on the other hand recognising the views of some economists that ‘the housing market boom is over’. While the latter could be considered to prevail the former, does this make the issue worst?

Even if the housing market boom is in fact over, there is a legacy issue that still needs to be dealt with in that while the problem may or may not increase – Hawkes Bay had the problem, and that problem remains.

Our concern is where does the motivation and funding come from to address the initial problem if there is a perception that end buyers are not there – especially in a climate of increasing building costs, uncertainty and greater onus around lending.

Further, while fast-track planning processes have been established under the RMA to speed up delivery, is the motivation there to take these up, especially when from the outset they are still relatively daunting processes and not necessarily quick relative to the somewhat volatile environment we’re playing in.

We’re finding ourselves thinking a lot more about what planning process may be the best for a given development scenario – is it a standard subdivision resource consent process? Should it include a concurrent land use consent to allow houses to be built quicker – noting that this may involve investment prior to the certainty of consent, or is the Covid 19 Recovery (Fast Track Consenting) Act 2020 the better option? This option may work well for development where the actual built outcome is known, but not so well for subdivision where various development scenarios would need to be provided up front with little flexibility during implementation.

On the other hand, while many of the limitations around resource consenting processes can be addressed through a Schedule 1 District Plan Change process, these are typically longer processes, and while the Streamlined Planning Process was introduced to try and speed these up through limiting appeals, there are entry criteria and approval is required by the Minster.

All these options have their own advantages and disadvantages and its all about matching the circumstances of the proposal to the process. The point is, without a high level of motivation, they are all daunting. So, if motivation is dropping or the appetite for risk is dropping, or does indeed drop, what then?

The answer lies in working together, and our observations are that our Councils are very open to this – in fact they’re doing it. Examples include 18 houses completed on Korowhai Street Flaxmere, funded by MHUD, built by Soho Development and managed by Te Taiwhenua o Heretaunga, housing completed at Kainga Ora’s 40-lot development at Kauri Street/Place, Te Taiwhenua o Heretaunga and Waingakau building 120+ houses for intergenerational whanau, and similar infill developments being completed by both Kainga Ora and private developersin Napier.

We’ve been fortunate to have been involved in the planning of a lot of these developments and have certainly noticed a theme of greater collaboration and smart resourcing to reduce risk and build certainty earlier in the process.

If we can achieve this, then confidence, or at the very least, comfort, is maintained, motivation is sustained, outcomes are delivered, people are housed, and our region is as great as we all know it can be.

We think it’s important to think outside the square, be open to working together differently and leverage off the strengths or opportunities of others – while being aware of the limitations and drivers of the various players involved. It may seem cliché, but collaboration from start to finish is where ‘easy’, or at least ‘easier’, is probably going to be found.

Getting the Basics Right

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Every business, regardless of industry or size, is vulnerable to cybersecurity attack- that’s just a fact; your business is not immune. As of the writing of this article, there’s an uptick in attacks across New Zealand in both the retail and manufacturing sectors, businesses that normally would be considered low on the radar, and that will only increase in these and other unexpected segments during the year.

According to CertNZ, 2021 was a busy year with 8,831 cyber incidents reported and a combined loss over $16.8 million (these are just reported cases). The primary causes of these incidents were phishing and credential harvesting, scams & fraud, and malware; where phishing had a significant increase in numbers.

I often hear, “We don’t know what we don’t know,” with many businesses adding that they’re not experts in cybersecurity. Covering the basics doesn’t require a specialized skillset or a large financial expenditure. There are four pillars of cybersecurity that every company should cover; securing people, securing communications, securing data (note: this was inadvertently missing from our last article), and securing technology.

Securing People

As noted above, the primary cause of cybersecurity breaches begins with phishing, credential harvesting, scams, and fraud- all due to direct interaction with people. Training employees to look for anything out of the ordinary and taking precautionary steps helps reduce the risk of exposure. Employees trained properly become your human firewall and first line of defense.

Securing Communications

Using technology to secure your inbound email and other communications works in concert with securing your people to reduce the initial attack surface. Products such as Trustifi can also help businesses secure outbound email traffic which is the main source of cyberactivity. Intercepting and misrepresenting emails in transit to recipients are ways cybercriminals deliver malware and harvest business and employee information. Protecting confidential information such as invoices, contracts, etc is especially important.

Securing Data

As our businesses grow and we’re on the move more, the flexibility of having our data up to date and accessible everywhere increases. Platforms like Office 365 and Google allow us to work collaboratively and provide us with that mobility and some extraordinary powerful tooling. SharePoint, office applications, OneDrive and email everywhere is important in today’s business world. In addition to protecting access, securing data means the ability to back it up and retrieve it if lost. These platforms offer limited and complex backup options which spells trouble if you need it now and it’s vanished. There are however some very good cloud-to-cloud solutions to secure your data and give peace of mind.

Securing Technology

Securing PC’s, laptops and other mobile devices is the last line of defense. Should something slip through your people and communications layers, having next generation Anti-virus technology on those devices is critical. Reliance on the off the-shelf brands that we’ve long known is not going to stop many of the advanced malware and attack methods. You need something built for a business environment.

All or any combination of the pillars mentioned here will go a long way to establishing reliable, resilient cybersecurity as the key to defending your business. Carefully selecting the right products and combinations is important, and the good news is that many of the technologies cost about the price of a coffee per month. A small price to pay for a big sense of relief.

The construction sector – The have’s vs the have not’s

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The opportunities and challenges inherent within New Zealand’s construction sector have always been amplified by its cyclical nature. With the high demand construction firms are currently experiencing in both the commercial and residential sectors, we are seeing the industry take fresh approaches as it responds to market challenges such as procurement of materials and delays due to supply shortages as well as mitigating financial risk with changes to negotiating and pricing of contracts due to inflation and market pressures. These key challenges will provide the footing for those within the industry who will continue to thrive and those who may fall victim to their own lack of forward planning.

Supply chain challenges

While non-availability of construction products and materials arising from disruption to production and shipping was an expected consequence of  the global pandemic, supply chain challenges have progressively worsened over the past 12 months, evolving into the major challenge it is today. 56% of respondents to BDO’s latest Construction Sector report indicated that they had experienced project delays directly linked to receiving materials later than originally planned and 32% of these experienced delays exceeding two months.

The sector has been quick to rethink and apply new strategies to mitigate this situation,  such as procurement teams tracking individual shipping movements to know exactly where their materials are. They are identifying alternative suppliers in case their historical supplier can’t deliver and where possible materials are being ordered and stored well before they are needed. Forward planning on projects has allowed some companies to keep a strong profit margin on a number of jobs by adopting these methods. Those who have also been able to strategically pass on additional costs incurred by these methods directly to the client, have fared best of all.

Inflation is underway

Builders and construction companies are receiving supplier emails advising of price increases weekly. Often, price increases exceed the gross margin of many companies. The issue is not restricted to materials; the acute shortage of labour in the sector is significantly forcing up labour costs too. We have been through a prolonged period of low inflation and most building contracts have a fixed price.

Initially builders and subcontractors were being forced to absorb the price increases. This is not sustainable, and practices need to quickly change. Inflation is not a risk that the construction industry has capacity to absorb. It is a risk that needs to be passed on to those best equipped to absorb it; the clients. Most construction firms expect significantly higher costs to flow onto clients, but acknowledge that contracts will need to change to allow for this.

Determining a projected final contract price will be challenging as each subcontractor and each materials supplier will want the ability to pass on increases that are more than modest. The head contractor/builder must collate these into a winning bid when quoting for projects, a very challenging task. Clients won’t be able to easily select a builder based on price alone moving forward and non-price attributes will become a greater factor in builder selection.

Margins

A distinct trend is developing in respect to financial sector performance and outlook. The majority of large head contractor firms are seeing their gross margins grow, while gross margins decline for small head contractor firms and the subcontractors  category. Should this trend continue for the sector, we risk seeing smaller companies battle each other on low margins in a period of high risk which will inevitably result in casualties. Organisations need to decide whether they will turn down some forward work – staying at existing activity levels and within the capacity of their staff and suppliers to manage. If they take on additional projects, they run the risk of being unable to successfully manage and perform on those projects, resulting in losses.

The Growing Value of Insurance Cover

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Recently there has been significant coverage given to the rapid escalation of costs within the New Zealand (NZ) construction sector. It’s no surprise then that this has seen a sharp increase in the cost to build/ rebuild in a comparatively short time frame. However, even if your policy includes an automatic inflation guard to cover annual inflation, your coverage has probably not kept pace with this unexpected spike in building and labour costs. To be protected against loss, your coverage should equal the cost to rebuild. An accurate valuation is vital to ensure policyholders have appropriate coverage in the event of a loss as this will allow you to replace your asset in the event of disaster and this will directly impact the values assessed to ensure your property is adequately insured.

What is causing building costs to escalate?

Escalating costs within the building sector can be attributed to the Covid-19 pandemic as it has impacted three key areas, labour, materials and inflation. Globally the pandemic has caused labour shortages and locally we have also been impacted in large due to the lack of immigration caused by the closed borders as well as the Governments slow response to easing these settings especially in a boom.  This has contributed to the industry facing a labour shortage across the skills spectrum, with a particular shortage in higher-value roles.

Findings from the EBOSS Construction Supply Chain report in Q1 of 2022 found that 33% of suppliers don’t have enough staff to meet current demand and 56% say they don’t have enough staff to meet future demand. Furthermore, efficiency on building sites has declined due to health and safety requirements, increased public holidays, new sick leave provisions, the restrictions on the number of workers allowed on site as well as the onerous sign-in protocols have also directly contributed to the escalating cost to build/rebuild.

The same result also noted the following key findings:

  • 8% of those who rely on imports say they’re experiencing issues supplying the market
  • 90% of construction products sold in NZ are either imported finished products or manufactured locally from at least some imported components.
  • 73% of suppliers surveyed say the increased cost of freight is their biggest issue, followed by increased cost of offshore materials (64%), freight lead times (56%) and delays at NZ ports (41%).
  • Almost two thirds (64%) of suppliers have experienced significant increases to the cost of their materials (buy costs) over the last six months.
  • On average prices are predicted to increase 11%, with the cost of materials (buy cost) averaging an increase of 11% – indicating suppliers believe the two will be more aligned going forward.

It’s no surprise then that the cost to source and supply materials has gone up, especially as NZ is particularly reliant on imported materials for its construction sector. Initial lockdowns caused port closures and disruptions and the world had been trying to catch up ever since. The consequent effect of the backlog has caused freight congestion with ports globally now struggling to catch up. This in turn has created a shortage of available containers. Further exacerbated by a ‘demand boom’ both nationally and internationally is only adding extra pressure to an already stretched supply chain.

These factors as well as increasing fuel costs have contributed significantly to the upward trajectory of inflation, significantly adding to the overall operational cost and contributing to the escalating cost to build in a relatively short time period. This spike is not predicted to ease any time soon with major infrastructure projects and the volume of residential building activity lifting to historically high levels at $8.1 billion. (MBIE May 2022)

How does this Impact your Replacement Insurance Value?

Firstly, it’s important to understand that Market Value (MV) of your property can be very different to the Reinstatement Value which refers to the cost to replace your asset today, to the same size and scale, considering  modern equivalent technologies, materials and services. Therefore, cost does not always equal value and if you have an older premises, cost to recreate may well be above the asset’s current market MV. However, with construction costs rising quickly in a  comparatively short period and with most property insurers on an ‘Agreed Value’ policy, this means anything over and above that amount will not be paid out if the property needs repairs or a total rebuild.

As a result, you could discover that your existing policy limits and coverage no longer offer adequate protection. Considering these ongoing cost concerns, insurance companies are being proactive and asking for more regular valuations compared to five years ago.

It is important for property owners to be proactive too and the most prudent thing they can do is to make sure they have a current replacement insurance sum that is as accurate as possible. Unfortunately, insurance companies have already signaled that due to rising construction costs, an increase in claims due to the impacts of the cost escalations as well as the increased cost of reinsurance, premiums are signaled to go up.

Small Trade Contracts: What you need to know moving forward

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The Fair Trading Amendment Act 2021 comes into force in August 2022 and this will place new obligations on businesses while providing new protections for consumers and small businesses.

The key change is that “standard form small trade contracts” will now be subject to the unfair contract principle.

To understand the significance of this change we first need to identify what constitutes a “small trade contract”? A small trade contract will need to be:

■ Between two parties engaged in trade;

■ Not a consumer contract; and

■ Not part of a trading relationship with an initial annual value exceeding $250,000.00 including GST.

Examples of a small trade contract will include terms of trade presented to a customer with little time for the terms to be reviewed or negotiated.

Prohibition of “unfair contract terms” A term will be considered “unfair” where:

■ It creates a significant imbalance of rights and obligations between the contracting parties;

■ the imbalance is not required to protect a party’s interests; and

■ if used, the term could disadvantage the other party. A provision giving only one party the ability to take certain actions (for example, varying the terms or terminating the contract) is likely to be considered “unfair”. Other terms that may be considered unfair include automatic rollover and renewal clauses, early termination charges and some forms of indemnity terms.

It is really important to remember that the Fair Trading Act is not designed to – and won’t – disadvantage a business that has a legitimate business interest and a term is required to protect this interest.

Unconscionable conduct

Unlike “unfairness”, the principle of “unconscionable conduct” is more nuanced, and less defined. Unconscionability will be considered on a case-by-case basis.

Factors that can be considered include:

■ Relative bargaining power of the parties;

■ Extent to which the parties acted in good faith;

■ Whether there was any undue influence;

■ If the affected party was able to understand the documents;

■ Commerce Commission.

The Commerce Commission has authority to commence proceedings against a business, if it believes that the terms of a contract are unfair, even if they are not party to the agreement or contract. As a result, it is important for a business to understand its obligations and to ensure that its standard form contracts will comply with the Fair Trading Act.

Existing Contracts

These changes will not apply to any contracts entered into before 16 August 2022.

However, take care when making any changes to existing contracts as the provisions will apply to contracts amended or varied after 16 August 2022 irrespective of when the contract was first entered into.