Super Fund eyes $1b Queenstown deal

The NZ Superannuation Fund (the Super Fund) is in talks to underwrite an ambitious $1 billion Queenstown property development as lenders get the shivers over its sale prospects.

The deal could make the Super Fund the buyer of last resort for parts of a project at Kawarau Falls Station which remained unsold when it was finished.

Neither the Super Fund nor Kawarau Falls' developer Nigel McKenna were prepared to comment on the proposal, but sources close to the parties have told the Sunday Star-Times that the Super Fund has indicated it would be willing to underwrite the project, but the parties have not been able to agree on the terms and negotiations are continuing.

If they agree on terms and the proposal proceeds, it would be the first time the Super Fund has entered into a property development underwriting arrangement.

That the Super Fund would even consider such a deal is causing concern in investment circles, because of the likely risks involved.

Economist Gareth Morgan described the proposal as "unbelievable" and accused the Super Fund's managers of acting as if they were bankers.

"The Super Fund is getting into trouble," he said. "They didn't have the brains to move [their investments] into cash when the market turned south. So here they are, strung out and taking the full hit of [equity] markets over the last two years. That to me is just total incompetence.

"So now they are desperados out for a quick buck to try and make themselves look better."

The Kawarau Falls project covers 6.5ha on the shores of Lake Wakatipu. It is being developed by McKenna's company Melview Developments, which also developed the Beaumont Quarter and Lighter Quay projects at Auckland.

Construction of the first stage of the project, which will include two international hotels and an extensive upmarket housing component, is well under way. This is being financed by Bank of Scotland International (BOS), which has a first mortgage securing up to $513m, and Hanover Finance which has a second mortgage securing up to $150m, although it is not known how much these financiers may actually be owed.

Funding for a second stage is to be provided by Fortress Credit Corp with Hanover as second mortgagee.

Most of the funds used for the project so far are likely to have come from Hanover, but the requirement for an underwrite agreement probably came from BOS as its funding lines started to be drawn down.

It is not known what form the underwrite agreement being considered is likely to take, but there are generally two types of arrangements.

McKenna has pre-sold large parcels of the project to two UK-based buyers, one a private investor who is buying a chunk for about $100m, and another larger chunk to Blue Sky Capital for more than $300m.

If either of those parties failed to settle on their deals, an underwrite arrangement may require the Super Fund to step in and acquire the affected properties itself.

An alternative would be for the Super Fund to agree to buy any unsold portions of the development that were left once it was completed.

In return, the Super Fund would receive a substantial upfront underwriting fee, which would likely be paid by the developer (Melview). And any parts of the property it acquired would almost certainly be at a significant discount to their assessed market value.

The size of the fee and the discounts are likely to be the key sticking points in the negotiations.

The value of such an arrangement to the financiers is that if sales of the project do not go according to plan, there will still be a minimum amount of money available to them when construction is finished.

The risk to the Super Fund is that it could end up having to pay what could be several hundred million dollars for properties which may be of uncertain value by the time they are finished and which may be difficult to resell.

"I think it raises serious questions as to what they are doing," Morgan said.

The Super Fund invests taxpayers' money to help pay for state pensions in the future. It has $12.5b under management.

- © Fairfax NZ News