The perennial debate - do we build up or out?

In the ongoing debate of brownfield (build-up) versus greenfield (build-out) development, there’s a compelling case for both. And like most great debates, nuanced realities influence a developer’s choice and cost when it comes to deciding what land will work best for their next project. In this final article in a three-part series on housing development, our national land development manager, Campbell McGregor looks at the benefits of green and brownfield development and how we can find balance to address housing affordability and sustainability in the future.

There’s an abundance of literature that says brownfield development can be delivered for a ‘whole-of-life’ lower cost.

When assessing brownfield versus greenfield, it’s easy to understand that people living closer together have numerous benefits from both an infrastructure and efficiency point of view.

Upsizing a pipe is a small proportion of the overall cost of putting a pipe in the ground. Higher densities maximise return on investment for any public transport and community facility initiatives and minimises the loss of productive land to housing. 

However, what these matters ignore is where the costs and benefits of this approach reside.

From an initial capital cost perspective, you only need to look at the Kāinga Ora redevelopment programme in Auckland where construction can cost 10 to 25 per cent more than if you were to construct the same infrastructure in a greenfield subdivision.

These costs are primarily driven by the fact it’s more expensive to replace existing infrastructure than to put in new infrastructure. There are also higher costs associated with conducting works in often highly constrained brownfield environments which generally have much more interface with the public and access requirements for existing housing stock.

The true benefit of brownfield development is only truly realised for the long-term asset owner as they have fewer assets to maintain.

As the developer generally vests all the assets they create as part of a subdivision, this ongoing maintenance cost and risk is not borne by the developer.

Councils are now looking more closely at the true ‘whole of life’ costs of asset renewals and trunk infrastructure upgrades to service greenfield development and we’re seeing this reflected in significant increases in Development Contributions for growth areas such as Auckland’s Westgate and Drury.

A further outcome of assessing the ‘true costs’ associated with greenfield development is that councils are now taking a more focused view on ‘whole of life’ costs for assets and are generally reluctant to take on additional parks, stream corridors or other assets which come with significant ongoing maintenance costs or those assets that are seen to provide limited benefits for the wider community.

The issue is set against a backdrop of National Policy Statements that look to preserve and protect larger swathes of land within developments for the benefit and protection of ecosystems. At the same time, a desirable environmental and social outcome, who pays for this outcome remains an ongoing and unresolved discussion. It’s putting pressure on greenfield development costs and potentially narrowing the gap between greenfield and brownfield development initial capital costs.

While all this potentially leads to the true cost of greenfield development being more accurately reflected, all this means is that any costs levied from developers to meet the cost of infrastructure are ultimately passed on to purchasers thereby driving land and/or housing costs higher and further impacting affordability.  The alternative is that development feasibility no longer works and housing development is delayed until demand pushes pricing higher.  Neither outcome is a desirable one for society.

A potential outcome of these changes is that we see a further divergence between Development Contribution levies between brownfield and greenfield development i.e. targeted rates. While this will likely drive more brownfield development, the scale, supply and effectiveness of brownfield development is a significant way from the overall level of demand for housing.

While “building up” may make sense, it also carries a completely different risk profile from a developer’s perspective. 

Firstly the cost of the building is much higher and the time to construct the building is longer, therefore the risks associated with these types of builds are higher and therefore require either a higher level of return, a developer with large cash reserves, or both.

Secondly, due to the longer period over which brownfield urban regeneration and development takes place, there is the potential to miss the more buoyant parts of property cycles, in which case, once the product is completed it may be harder to sell and achieve adequate margins.

Nevertheless, building up does offer many benefits from an overall community perspective, in terms of both well-functioning communities and lower per capita ‘whole of life’ operational costs.

Conversely, greenfield development relies on more traditional house builds and therefore presents a lower risk profile for developers and is often favoured for this reason.

However, greenfield development costs are increasing as a result of increased ecological costs (larger areas of land set aside for ecological benefit) and as councils act to better reflect the true ‘whole of life’ cost of infrastructure networks serving greenfield development.

In conclusion, while building up has clear community benefits, the financial and risk implications for the developer are significant.  Conversely, building out despite its lower developer risk, provides a larger burden on asset owners.  Asset owners are now trying to reduce the burden of infrastructure costs and low-priority assets through the non-acceptance of assets or increased Development Contributions.  Balancing these factors to ensure both building up and out remain viable options for housing will be key now and in future.