'Huge' losses for Westpac in project crash

Investors face losses of tens of millions of dollars following the collapse of the leasehold development of the huge Albany City project on Auckland's North Shore, and Westpac Bank is likely to be the biggest loser.

Although the extent of Westpac's losses are not yet known, a source familiar with the project's financing said they were likely to be "huge".

The project was the brainchild of prominent North Shore developer Rick Martin, who purchased the vacant 44ha site from Singaporean interests in 2005 for $250 million, in what was believed at the time to have been the biggest private sale of land ever in this country.

Funded by the Bank of Scotland International (BOSI), Martin intended to develop a new city centre on the site, which sits next to North Harbour Stadium and Westfield's giant Albany shopping mall.

His plans included construction of high-rise towers housing 2000 apartments and office space for 15,000 workers, as well as extensive retail space. At the time, it was estimated the project would have a value of $3.5 billion once completed.

Rather than undertake the development risk himself, Martin retained freehold ownership of the land and created leasehold titles over individual development sites, which he sold to a joint venture company (the JV) set up by businessmen Colin Reynolds, Kevin Podmore and Mike O'Sullivan.

All three had extensive backgrounds in the property sector.

Reynolds rose to prominence in the 1980s as chairman of the ill-fated Chase Corp which crashed and burned after the 1987 sharemarket crash, leaving investors $800m out of pocket.

Podmore and O'Sullivan's family interests are ultimately the largest shareholders in property financier St Laurence, which collapsed into receivership in May.

The JV was backed by Westpac, which provided a mortgage-secured loan for up to $150m over the JV's leasehold interests.

Under the complicated arrangements the JV entered into, it was required to pay ground rent to Martin even if the land was vacant.

Eventually it would have recovered that money from the income each site would have provided as it was developed, but in the meantime it drew down on its Westpac mortgage.

The JV's plans came unstuck as the recession sent the property market into a tailspin and the tide of investor sentiment turned against leasehold developments.

It was able to continue only for as long as Westpac kept the money flowing. Last year Westpac pulled the plug and the JV defaulted on its ground rent payments to Martin.

That would have allowed Martin to cancel the JV's leases, which meant it would have lost its only significant asset in the project and Westpac would have seen the security for its loan disappear.

Legal action prevented that happening until two weeks ago, when Martin, with the support of BOSI, was finally able to cancel the leases and take over the project.

As a result, Westpac's losses are now being realised, although the bank was unwilling to discuss how large they might be when approached by the Sunday Star-Times last week.

A few clues about the potential size of the losses can be gleaned from the 2009 accounts of Albany City Property Investments (ACPI) Ltd. That company was set up in 2006 as a joint venture between the Reynolds/Podmore/O'Sullivan interests and Australian company Valad Funds Management.

It raised $20m from the public via an unlisted bond issue to buy the sub-leasehold titles of three sites covering 12.8ha within Albany City for a development including an 11-building office park, a retirement village and a hotel. As well as the money raised from the bond issue, it also received funding from Westpac, secured by a first mortgage on its sub-leasehold interests.

However, only one of the 11 planned office buildings was built and that remains half empty. The other sites remain bare land.

According to ACPI's accounts to March 2009 (it has not yet filed accounts for the year to March 2010) the company was insolvent, with negative equity of $78m. At that point it already owed Westpac $41.3m.

- © Fairfax NZ News