Disclaimer:
This article provides general information only and does not constitute engineering, legal, or financial advice. Earthquake-prone building legislation is complex and subject to change. Always obtain a Detailed Seismic Assessment from a qualified engineer and consult with appropriate professionals before making investment decisions involving earthquake-prone buildings.
Key Takeaways
- A building is earthquake-prone if it has less than 34% of the New Building Standard (NBS), meaning it would likely collapse in a moderate earthquake.
- Owners of earthquake-prone buildings must remediate within timeframes set by the Building Act, typically 15 to 25 years depending on location and building use.
- Remediation costs vary widely but can range from $500 to $3,000 per square metre, sometimes exceeding the building's value.
- Insurance and financing become difficult or impossible for earthquake-prone buildings, affecting both holding costs and resale potential.
- Some investors find opportunities in earthquake-prone buildings by purchasing at discounts that exceed remediation costs.
Earthquake-prone buildings present both risks and opportunities for property investors. Understanding the legislation, costs, and implications is essential before considering any investment in a building that may be, or might become, earthquake-prone.
Since the Canterbury earthquakes, New Zealand has significantly strengthened its approach to earthquake-prone buildings. The Building (Earthquake-prone Buildings) Amendment Act 2016 created a national system for identifying and remediating these buildings, with significant implications for property owners and investors.
What is an Earthquake-Prone Building?
A building is legally earthquake-prone if it has less than 34% of the New Building Standard (NBS). This means that in a moderate earthquake (one that has a 10% chance of occurring in any 50-year period), the building would likely perform so poorly that it could collapse or cause serious harm to occupants.
NBS Rating Guide:
- Below 34% NBS: Earthquake-prone, remediation required
- 34% to 67% NBS: Earthquake-risk, remediation encouraged but not legally required
- 67% to 100% NBS: Meets minimum legal standard
- Above 100% NBS: Exceeds current code requirements
It is important to note that a building rated at 34% NBS is not one-third as strong as a new building. NBS ratings are logarithmic, so a 34% NBS building has approximately 10% of the seismic performance of a 100% NBS building.
How Buildings are Identified
Councils identify potentially earthquake-prone buildings using a three-step process. First, they apply a methodology to identify buildings that may be at risk based on age, construction type, and location. Second, owners of identified buildings must provide an engineering assessment. Third, if the assessment confirms the building is below 34% NBS, the council issues an Earthquake-Prone Building notice.
Buildings most likely to be identified include unreinforced masonry buildings, older concrete buildings, buildings with irregular shapes or soft storeys, and buildings that have been altered in ways that affect structural performance.
Timeframes for Remediation
Once a building receives an EPB notice, the owner has a set timeframe to complete seismic strengthening or demolition. These timeframes depend on the seismic risk area and building use:
Remediation Timeframes:
- High seismic risk areas: 15 years (7.5 years for priority buildings)
- Medium seismic risk areas: 25 years (12.5 years for priority buildings)
- Low seismic risk areas: 35 years (17.5 years for priority buildings)
Priority buildings include those on strategic transport routes, those that could fall onto such routes, and buildings that are normally occupied by many people or essential services. Hospital and emergency buildings have even shorter timeframes.
Costs of Remediation
Seismic strengthening costs vary enormously depending on the building type, current condition, target NBS level, and complexity of the work. Simple strengthening might cost $500 per square metre, while complex work on heritage buildings can exceed $3,000 per square metre.
Cost Considerations:
- Engineering assessment costs ($5,000 to $50,000 depending on complexity)
- Consenting and compliance costs
- Loss of rental income during works
- Temporary relocation costs for tenants
- Potential need for simultaneous upgrades (fire, access, asbestos)
In some cases, remediation costs exceed the building's value, making demolition the more economic option. This is particularly common with smaller unreinforced masonry buildings where the land value significantly exceeds the building's contribution.
Insurance Implications
Obtaining insurance for earthquake-prone buildings is extremely difficult. Many insurers will not cover EPB buildings at all, while others impose severe restrictions or exclusions. Even buildings that are earthquake-risk (34% to 67% NBS) may face higher premiums or limited cover.
Without adequate insurance, lenders will not provide finance against the property. This significantly limits the pool of potential buyers and can make existing loans problematic if insurance is cancelled. Before purchasing any older building, obtain insurance quotes as part of your due diligence.
Impact on Property Values
EPB notices typically result in significant value decreases. Studies suggest discounts of 20% to 50% compared to similar non-EPB buildings, though the actual impact depends on remediation costs, remaining timeframe, and market conditions.
The discount often exceeds the actual cost of remediation because buyers factor in uncertainty, financing difficulties, and the risk that costs may exceed estimates. Buildings close to their remediation deadline or those facing particularly expensive strengthening may be essentially unsaleable.
Investment Opportunities
Despite the challenges, some investors have done well with earthquake-prone buildings. The key is purchasing at a discount that more than covers remediation costs plus a margin for risk. This requires accurate assessment of strengthening costs, clear understanding of timeframes, and ability to fund remediation without relying on bank finance.
Potential Opportunities:
- Buildings where remediation is straightforward and well-understood
- Properties where land value supports the total acquisition and remediation cost
- Buildings with long remaining remediation timeframes
- Situations where current owners need to sell urgently
- Heritage buildings where grants or incentives may be available
However, these opportunities require specialist knowledge. Without engineering expertise and experience with seismic strengthening projects, the risks of underestimating costs are significant. Many investors have lost money on EPB buildings when remediation proved more expensive than anticipated.
Due Diligence Requirements
Before purchasing any building that is, or might become, earthquake-prone, comprehensive due diligence is essential. This should include a Detailed Seismic Assessment (DSA) from a qualified structural engineer, not just an Initial Seismic Assessment. The DSA should identify exactly what strengthening work is required and provide cost estimates.
Also check the LIM for any EPB notices, review the property file for previous assessments or remediation work, obtain insurance quotes, and understand the financing implications. Allow adequate conditions in your purchase agreement to complete this due diligence.
The Bottom Line
Earthquake-prone buildings are not necessarily bad investments, but they require specialist knowledge and careful analysis. The combination of remediation requirements, insurance difficulties, and financing constraints means these properties are not suitable for most investors.
If you are considering an EPB investment, ensure you have expert advisers, realistic cost estimates, and sufficient financial resources to complete the required work. Get the due diligence right, and there may be opportunities. Get it wrong, and you could face significant losses.
Frequently Asked Questions
Can I be forced to demolish an earthquake-prone building?
If you do not remediate within the required timeframe, the council can issue notices requiring the building not be used or occupied. Ultimately, the council can carry out the work itself and recover costs from the owner, or apply to have the building demolished. In practice, most owners remediate or sell before reaching this point.
What is the difference between earthquake-prone and earthquake-risk?
Earthquake-prone buildings have less than 34% NBS and face mandatory remediation requirements. Earthquake-risk buildings are between 34% and 67% NBS. While remediation is not legally required for earthquake-risk buildings, they still face higher insurance costs and may be difficult to finance or sell.
How do I find out if a building is earthquake-prone?
Check the council's earthquake-prone building register, which is publicly available. Also request a LIM report, which will note any EPB status. For buildings not yet assessed, consider the age and construction type as indicators of potential risk, and commission your own engineering assessment.
Are there grants available for earthquake strengthening?
Some councils offer heritage grants or incentives for strengthening character buildings. The criteria and amounts vary by council. Heritage New Zealand also provides some funding for registered heritage buildings. These grants rarely cover the full cost but can make marginal projects viable.
