We pulled 10 gems from the torrent of property news this week to keep you abreast of the most important insights affecting property investors 23-29 May 2020
In property news this week…
- Mortgage interest rates drop and term deposits take a hammering
- RBNZ says deposit rates could go to 0% so put your money elsewhere
- Provincia releases first view-on-demand webinar for investors
- Industrial remains resilient despite disruption
- Goodman Property Trust benefits from industrial focus
- Revaluations plunge Kiwi Property into loss
- Quarterly Economic Forecasts: Fast & Furious
- Consents for carports, sleep-outs and sheds scrapped
- Mansons delays $500m project
- What is money printing?
Mortgage interest rates drop and term deposits take a hammering
Good news: the average 2-year fixed mortgage interest rate has just dropped to 2.9%. A year ago it was 3.95% and two years ago it was 4.5%.
Bad news: all major banks reduced their 1-year term deposit interest rates. ASB is the lowest at 1.8% with ANZ and Westpac a smidgen away at 1.85%. BNZ is at 2.0% and both Kiwibank and TSB are at 2.15%. Expect more falls.
We’ve added a new mortgage interest rates section to our NZ Interest Rates Forecast page.
RBNZ says deposit rates could go to 0% so put your money elsewhere
Reserve Bank deputy governor Geoff Bascand suggests at least some bank depositors might want to put their money to use elsewhere.
Speaking to interest.co.nz after the Reserve Bank issued its latest Financial Stability Report on Wednesday Bascand, who is also general manager of financial stability, told interest.co.nz it’s possible deposit rates could drop to zero. This is against the backdrop of the COVID-19 crisis and the Official Cash Rate (OCR) at just 0.25%.
“We don’t really anticipate negative deposit rates,” Bascand said.
He said negative wholesale or interbank deposit rates are possible, but for retail depositors the Reserve Bank is “expecting them to be floored by zero.”
“Deposit rates have been declining and that’s part of what we have to do in a monetary policy sense to reduce the cost of funds to banks so that they can reduce the cost to borrowers. And I guess it also encourages savers to look at other areas to divert those funds,” said Bascand.
“They could put it into other assets… so hopefully seeing that saving used closer to supporting the economy.”
“What we’ve said for quite some time is we expect interest rates to be very low for quite a period of time. There’s not just a short dip and we suddenly see interest rates go up. We think in the circumstances it’ll be quite a while for real growth to pick up, let alone inflation to pick up. There’ll be quite a lot of surplus capacity in the economy, unemployment, other resources not fully utilised, capital that could be sitting a bit idle.”
“It takes a while for any likelihood really of interest rates to rise. So if you’re a saver you’ve got to say ‘well, do I just accept that?’ You’ve always got to mix up the safety element, how much I want certainty of my savings being there, which is why you might keep it in a term deposit or a bank, versus how much I need income from it or a higher return. And I might get a higher return somewhere else. They’re going to have to make those portfolio choices,” Bascand said.
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Industrial remains resilient despite disruption
A OneRoof article out today says the industrial property sector’s strong fundamentals are likely to provide a buffer against market changes as New Zealand recovers from the economic disruption of the Covid-19 lockdown.
Quoting new research from Colliers International, they say that while there could be some disruption in the short term, the industrial asset class generally performs well in periods of uncertainty and market upheaval.
Ian Little, Colliers’ newly appointed associate director of research, says: “Globally, many investors favour the defensive characteristics and positive aspects supporting the industrial sector, and New Zealand is no different.
“The heart of the industrial sector is goods-producing industries such as manufacturing and construction, which accounted for around one-fifth of New Zealand’s $300 billion economy in 2019, according to Statistics New Zealand.”
Other services such as transport, warehousing and postal services were already in growth before Covid-19 and have received a significant boost in recent months as people shift to online and ‘click and collect’ services.
Little says the industrial sector has been heavily in favour of landlords for an extended period with an extremely low vacancy rate, a modest supply pipeline and limited access to land for development activity.
Colliers’ latest Auckland industrial vacancy survey in February 2020 showed the overall vacancy rate was just 1.4%.
While development activity has taken place, there is only around 300,000 sqm of industrial space under construction, representing around 3% of total supply. This has not been enough to satisfy demand and is much lower than in previous cycles.
Greg Goldfinch, industrial national director at Colliers, says it is still too early to tell the full extent of the increase in space availability as a result of Covid-19, but there is likely to be a rise over the next 6-12 months.
“Historic market performance indicates that it is likely to appear in smaller secondary premises and fragmented across the region. Prime stock will remain in very short supply.”
Goldfinch says the buoyant economy and a shortage of available space has led to a decade of rental growth in Auckland’s industrial sector.
Prime warehouse rents now regularly push above $135/sqm, while average secondary warehouse rents are at some $115/sqm.
“While there is likely to be less rental growth in the industrial sector over the next year or so, the buffer provided by strong underlying fundamentals will help stabilise rental rates over the short term.”
Goodman Property Trust benefits from industrial focus
Keith Smith, chairman of New Zealand’s largest listed property investor Goodman Property Trust, said yesterday the continued execution of an investment strategy focused on the supply-constrained Auckland industrial market had contributed to another strong operating result in the March 2020 year.
“While the economic outlook has deteriorated over the last three months, the quality of the assets, the focus on the industrial sector and low level of gearing gives the Board confidence that GMT will continue to deliver strong operating results,” Smith said.
Operating earnings excluding revaluations were down 12% but despite this, cash distributions will remain unchanged at 6.65c/unit, representing about 107% of cash earnings of 6.22c/unit. Cash distributions of at least 5.3c/unit are expected to be paid in FY21.
COMMENT: At today’s unit price of $2.20 the cash distribution of 6.65c/unit represents a 3.0% yield, dropping to 2.4% in FY21 (at today’s unit price).
Revaluations plunge Kiwi Property into loss
Kiwi Property, a leading owner of shopping centres and office buildings in New Zealand, has been hit by negative revaluations, which took the company to a $186.7 million net loss after tax.
Rental growth for the year to 31 March 2020 increased 4.0%, mostly due to office (+7.3%) and mixed use (+5.0%). Retail was only up 0.9%.
Chief executive Clive Mackenzie said Kiwi had offered tenants rent relief measures including rent abatements & deferments.
“Abatements apply to the first quarter of the 2021 financial year and are expected to impact funds from operations by $20 million ($14 million after tax), equivalent to around 8% of the gross rental income earned by the company in the 2020 financial year.”
Quarterly Economic Forecasts: Fast & Furious
Writing in ASB’s quarterly economic forecast out today, chief economist Nick Tuffley describes the fast & furious pace of our response to the Covid-19 pandemic and what’s on the horizon. Here’s an edited version…
- NZ abruptly went into a stringent lockdown on health risks, prompting a huge and rapid economic response.
- NZ comes out of stringent restrictions able to entertain the possibility of moving to ‘normal’ distancing.
- But the hard road of economic recovery is just starting and has several levels of its own to work through.
We are emerging out of lockdown into a very different world to the start of the year. Countries around the world abruptly headed into various degrees of lockdowns, all with marked impacts on economies.
NZ had the most stringent lockdown restrictions, according to Oxford University, as the Government ‘went hard’ and responded to the fast-breaking crisis at a furious pace. But equally, NZ is now in a position where it has hope of returning to a semblance of normality sooner than many countries.
The health crisis may be easing, but the economic crisis is only just starting. Economically, we see NZ as going through three stages: (i) surviving the crisis, (ii) adapting in a period of transition, (iii) reimagining itself into the new normal.
The crisis period is where we are now: surviving the impacts of the lockdown and reopening when ongoing restrictions, behavioural changes, and potential for spending caution mean revenue streams are highly uncertain. It is a time of swiftly making hard decisions. It is important to make sure that you are well on top of your financial position, particularly your cashflows, and that you have got all the support you need.
The transition period could be 12-18 months. During this time a number of important uncertainties such as the persistence of Covid-19, longevity of social distancing and border restrictions will linger but increasingly get resolved. Persistent and permanent shifts in behaviour will become more apparent. It will be a period in which being adaptable and flexible will be important.
Finally, NZ will reimagine itself in what will become the ‘new’ normal. Supply chains are likely to focus more on reliability and resilience, favouring local sources more even if at higher cost. Trade will be more focused on goods and on services that are provided remotely and less reliant on people movements. The importance of fully leveraging technology has been starkly highlighted, and will change how we shop, work, and influence where we live.
Consents for carports, sleep-outs and sheds scrapped
The government announced on Sunday it is removing the requirement for consents for low-risk building work like sleep-outs, sheds and car ports, although the work must still meet the Building Code.
Building and Construction Minister Jenny Salesa said the changes would mean councils could focus on higher-risk building work, boosting the building and construction sector.
“Single-storey detached buildings up to 30 square metres – such as sleep-outs, sheds and greenhouses; carports; awnings; water storage bladders and others will now not require a Council-approved building consent, which will result in 9,000 fewer consents to process a year.
They are expected to come into effect at the end of August after changes to the Building Act have been made.
Mansons delays $500m project
Mansons TCLM, New Zealand’s largest family-owned commercial property developer, has delayed a $500 million Auckland commercial development saying now is not the right time to start construction.
Culum Manson said the 12-level 30,000 sqm office block planned for the ex-NZME site at 46 Albert St had been put on hold temporarily due to coronavirus and the changed commercial environment.
What is money printing?
People keep asking Tony Alexander this question so he’s written a small explanation. Here it is…
Money printing does not mean the actual production of extra coins or bank notes. It goes like this. The government is running a deficit which it finances by selling bonds to investors. For each $1 million of deficit they will sell $1 million of bonds and that means there is no net injection of extra funds into the money system.
Now, imagine you are an investor with $1 million in your bank account and you plan buying government bonds which will be issued to finance the deficit. Just before you do so the Reserve Bank buys the bonds instead (probably not directly from Treasury but from someone else in the market who was already holding the bonds or had just bought them from Treasury.)
Now, the financial system has not just the $1 million deficit amount which might reflect higher benefits or wage assistance, but your $1 million which is still sitting in your bank account. Bereft of the bonds you wanted to buy but which the Reserve Bank bought instead, what do you do with your $1 million? You might spend some at the shops, you might leave it on deposit with your bank, you might invest in other assets like shares or property.
The printed money is your bank deposit. The Reserve Bank’s hope in snatching away the bonds you were going to buy is that they push interest rates lower than would otherwise be the case, that banks finding lots of money on term deposit will lend out more, that you might buy a new couch, and that people will feel slightly wealthier because you buy an asset and prices of those assets go up.
That latter effect is not spoken about by our central bank because it is politically incorrect in New Zealand to speak about policies designed explicitly to push up property prices. But that was the expressed intent of the Federal Reserve in the United States when they engaged in money printing after the Global Financial Crisis and it will happen here as well – eventually.
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This content is provided for general information only and should not be relied upon or used as a basis for making any investment or financial decision. To the extent that any information or recommendations in this content constitute financial advice, they do not take into account any person’s particular financial situation or goals. As individual circumstances differ, we strongly recommend you seek independent legal and/or financial advice prior to acting in relation to any of the matters discussed herein. Neither Newland Burling & Co Ltd nor Provincia Property Fund Management Ltd nor any person involved in this content accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this content.