The Du Val Group drama is a cautionary tale around the dangers of dodgy developers. And warning signs were there from the start. The group’s founder, Kenyon Clarke, was a former bankruptee. In 2022 FMA took DuVal to task about misleading representations of their wholesale investment funds.

Then there was the lifestyle – the yachts, the holiday homes in tropical locales – presented in a trailer for Kenyon and Charlotte Clarke’s self-funded realty TV show pilot and on their (now-deleted) social media accounts. It was very glam, and to those who would end up losing money, rather galling.

The group’s 64 entities have been put into statutory management with liabilities of about $250 million, says Price Waterhouse Cooper (PwC), the statutory manager. They says risks to investors and creditors will arise from a multiplicity of insolvency processes across the Du Val Group. (Note: Clarke continues to claim the company is solvent.)

Kiwis’ property obsession hasn’t thrown up any secret formula for avoiding unscrupulous developers taking investors’ money and tipping over into receivership, liquidation or, in the worst scenario, statutory management.

Without doubt there’s money to be made in developing property, but it’s not all supercars and capital gains. From buying land and getting council consent, to completing a build and selling a development, there are countless complexities for developers to tackle.

Property development is a high-risk game, and the learning curve is steep.

Developers come in all forms, from accidental (those who have inherited land and think they will give development a go) to builders who have worked in construction and have some skills, to the professional well-known brands, often with franchises across the country.

Over the past two years, labour and material shortages combined with rising construction costs and falling house prices have made many housing projects untenable, particularly as property development is a capital-intensive game.

It’s highly dependent on financing, which becomes scarce and more expensive during economic downturns.

As a result, many developers are increasingly hesitant to bring new projects to market, reporting low levels of pre-sales. And a raft of developers and building companies (435 in total) have been put into liquidation in the year to the end of February.

Du Val Group

Statutory management is rarely used and is the last resort in insolvency procedure; it allows a company and its assets to be frozen by the Crown.

Many property investors have been sceptical of Du Val and its business practices for some time. Christchurch-based property investment business, Opes Partners, has had Du Val on its list of developers it does not recommend for the past two years.

Opes resident economist Ed McKnight says it’s quite difficult to sort the good developers from the less-than-desirable operators because there is not always something dodgy investors can see from the outside. “Their financial stability is not easy to assess but it is relatively easy to check their track record for any financial difficulties.”

Red flags for Opes are developers biting off more than they can chew, developing in areas where they don’t live so they are not often on-site, and how long they have been in the development sector ... is it their first development or fifth?

McKnight says it’s extremely difficult for investors who are not in the development industry to figure out if a developer is trustworthy or not.

However, McKnight says the difficulty is that the warning signs are just warning signs until you get some confirmation of liquidation or a company going into receivership or sanctioning from the Financial Markets Authority (FMA).

He continues that Du Val was not a particularly large company, and it did not build a huge number of properties. And this was another red flag.

“Over the past five years it consented 18 times fewer properties than Mike Greer homes, just to use an example of a large national builder who’s got some substance,” he says.

“And so, on the one hand the Clarkes were living the high life, but on the other hand it didn’t make sense with the number of properties that were being consented. All of it adds up to the character of the company. Did we feel comfortable with that? No.”

Reputation The Key

Stephen McFarland, CEO of Ashcroft Homes, says that it’s important to verify the developer’s financial stability and reputation.

“Check for industry memberships (eg Master Builders) and ask for examples of past projects. Transparency is key - make sure there’s clear communication and no hidden costs. Doing your homework is critical. It will set you and your build-up for a successful journey and outcome by partnering with a company you can trust.”

He continues that it’s important to keep an eye out for warning signs.

“Watch for overextended developers, vague contracts, and limited transparency around pricing or timelines. All of these risk delivering nasty, costly surprises. Delays and price hikes can be common, especially with material shortages, so it’s vital that the builder has a solid plan and financial backing to deliver the client’s project, no matter what is happening in the economy.”

He explains that Ashcroft differs from developers in that they specialise in building on land owned by clients, which offers more control and input compared to working with a traditional property investment company.

“We guide the client all the way from the concept, understanding what they want to achieve, then approaching their build in the smartest way possible to deliver that outcome for them, removing stress with our full end-to-end service model, from Resource Consent to CCC and titles. We comply with all New Zealand regulations and maintain transparency throughout the build.”

Asking the right questions and considering key factors such as reputation, financial stability and communication, will help investors make a well-informed decision on which developer to choose, says Andrew Guest, founding director of property investment company Viranda.

Viranda has been instrumental in working with investors to develop housing at Ormiston in Auckland, supermarket and DIY shopping at Mangawhai, and housing at Homestead Bay, formerly part of the historic Remarkables Station in Queenstown.

He says property investing, like any type of investing, is totally dependent on the integrity of the party you’re investing with.

“An investor can choose to work with a developer considered to be of high integrity and they can do due diligence on the project to the best of their abilities, but unless they are an expert controlling the development site, all they are looking at is a spreadsheet,” he says.

“It’s all about reputation, and even then, investors have risks associated with it because the developer for all their genuineness and all their skill, might not foresee something that’s completely untoward, such as Covid.”

He says the other problem is a badly run development. “Once the financial pressures start mounting, they become a tsunami, and no-one can stop the consequences.”

To sort out the developer wheat from the chaff, Guest says the first step is to hire a good lawyer and accountant. “And choosing the independent lawyer and accountant, who cost effectively will spend time on the project, is probably as big a job as choosing the development.”

The Need To Audit

Investors need to audit every single statement made by the developer who has a huge financial interest in them putting money into the project.

“Go to your accountant and your solicitor and tell them forcefully to objectively look at the project and pick holes in it if possible. The lawyer might say, for example, ‘Well, they say they’ve got a consent, but I’ve done a search and there’s no consent granted yet’. So, the developer’s statement it has consent can be loosely translated into ‘we expect to get consent given our initial discussions with the council’s planning team’. It is an entirely different outcome – a big red flag and goes to reputation.”

One of the main focuses for Opes is understanding how many properties a developer builds every year; how long have they been doing it and how that will change.

A decent sized development company will be building about 50 houses a year. “If they have done that consistently for the past three years and they are going to do that again this year, then they are stable,” McKnight says.

“It’s when a developer built 10 houses last year, wants to build 50 this year and 200 the year after that Opes becomes a bit nervous because the scaling up is quick. That is where a developer can run into issues by biting off more than they can chew and not being capitalised to do this.”

The solid national house brands are also not immune from issues either, he says. Investors need to be aware if they are building through a national brand, they might be signing a contract with a local franchise owner who doesn’t have a lot of history in development. That franchise is either just using the national brand or paying a fee to use it.

“In a couple of instances investors have signed contracts with well-known development brands, the local franchise has gone into liquidation, and it hasn’t left them with a lot of safety,” he says.

“Many national brands say they have guarantees into their agreements to safeguard against that, but investors need to look out for clauses protecting them if they are doing a progressive payment build, especially if there are delays in getting the house finished and they are paying a mortgage.”

The Price

Despite the property market’s doldrums, Opes is helping investors buy about 50 properties a month. McKnight says there is a big difference between what prices developers want and what is investable.

The property investment company prefers to work with 10 to 20 good mid-sized developers. Larger developers tend to have more of a business to run, meaning more costs and so their new builds tend to be priced higher, McKnight says. “Many also feel their bigger and more well-known brands justify the bigger prices.”

Their prices might be justified, but whether that same property would make a good investment is another question. “We have a strict set of criteria around rental yields and the potential for long-term capital appreciation. Owner-occupiers aren’t quite as concerned with those things. The higher prices the bigger developers want might be justified, but that property at that price might not make a good investment.”

Key Questions To Ask A Property Developer

• Track Record Inspect other projects they’ve done and make sure they have a good reputation.
• Experience In Property Development Understanding a developer’s experience can give you insights into their capability and reliability. A higher number of completed projects can indicate a successful track record.
• Financial History Research whether a developer has run into financial problems on previous projects. A financially stable developer is less likely to face issues that could delay or halt the project.
• Reputation Look at the developer’s reputation through online reviews and feedback from previous buyers. Consistent positive feedback is a good indicator of reliability and quality.
• Triple Check Contracts First, get good independent legal and accountancy advice. Ask them to objectively find any flaws in what you are being told about a development. Make sure there is a solicitor’s approval clause in the contract, and if not, ask for it to be inserted. Ask where the deposit will be held; what happens to the accrued interest; what is the length of the conditional period; if there’s a sunset date (when the development has to be finished by) and what happens if extra time is needed?
• Warranties And Guarantees Ask the developer about structural warranties, appliance and fixtures warranties and the process for addressing defects or issues after completion. Understand the steps for reporting issues and how quickly they will be resolved.
• Communication A reputable developer will be open about project details, share comprehensive project information, give regular updates and be responsive to inquiries.