We pulled 11 gems from the torrent of property news this week to keep you abreast of the most important insights affecting investors. Week to 5 June 2020
In property news this week…
- Interest rates will stay low until 2024
- Investore profit slides
- PFI foregoes $500,000 of rent due to Covid-19
- Economic Weekly: Signs of life
- Risk and reward in Pukekohe
- IKEA rival Nido launched after multiple delays
- How New Zealand learned to stop worrying and love government debt
- Half of retail tenants have not paid their May rent – new report
- Little’s commercial rent relief solution too little too late
- Do our homes really account for 75% of household wealth?
- Why is popular media discussion of housing usually very pessimistic?
Interest rates will stay low until 2024
Writing in ASB Bank’s weekly economic report, senior economist Mark Smith says this about the medium-term interest rate outlook…
“We don’t expect the OCR to move above its 0.25% operational lower bound until 2024 at the earliest. If more policy stimulus was needed the RBNZ will likely increase its $60bn asset purchase programme before cutting the OCR. Weak global activity and RBNZ asset purchases should help to cap longer-term NZ interest rates despite a mountain of global public debt issuance.”
Investore profit slides
In a release on Wednesday, NZX-listed large-format store owner Investore Property Ltd revealed a profit slide of 26% in the year to March. Despite this, Investore is in a strong position with low LVR and is well positioned to acquire more properties.
The cash dividend was unchanged at 7.6 cps for the year. At Friday’s share price of $1.78 this provides investors with a 4.3% yield.
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PFI foregoes $500,000 of rent due to Covid-19
Property for Industry collected about 90% of rents due in April and May and has agreed to rental abatements and deferrals with 45 tenants amounting to about 1.2% of its annual rent, or about $1 million. Abatements and deferrals were evenly split, meaning that about $500,000 won’t be paid.
PFI’s CEO Simon Woodhams said, “As we have moved through the various levels of lockdown and the country has begun to start back up, our focus is on ensuring our tenants are able to perform going forward. On a case-by-case basis, a range of solutions have been agreed with a number of tenants to share the impact between the tenant and PFI.”
PFI has managed its portfolio well and paid dividends for the year totalling 7.6 cps, up slightly from last year’s 7.55 cps. At Friday’s share price of $2.40 the 7.6 cps dividend provides investors with a 3.2% yield.
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Economic Weekly: Signs of life
ASB says business confidence continued to lift throughout May and ASB card spending data show that spending has recovered to around pre-COVID levels.
This quick recovery in spending, coupled with a turning point in both business and consumer sentiment, is certainly a positive development.
Risk and reward in Pukekohe
A property on Pukekohe’s main street sold at Bayleys’ auction on Tuesday at a 9.25% yield.
The sale was for 1,630m² of character buildings in a high-profile position on the main street of Pukekohe, including 15 parking spaces accessed from a road at the rear of site. Total land area is 2,051m² with town centre zoning, the largest landholding on Pukekohe’s main street. Four tenancies with leases to 2022 and 2023 return $293,000 p.a. rent.
Here’s the risk side though. The building has a low seismic rating of only 40% of NBS, and the tenants are vulnerable retail and hospitality businesses in a Covid-19 world. Despite that, someone paid $3.166 million for a 9.25% yield.
If they keep their tenants, or quickly replace them if the current ones go under, and if they can get away without having to spend gazillions on seismic strengthening, their risk will be well rewarded. That’s a lot of ifs though.
IKEA rival Nido launched after multiple delays
New Zealand’s newest big-box retailer and IKEA rival, Nido, finally opened last weekend after 10 years of planning and 18 months after construction began.
Construction on the 31,000m² site at 158 Central Park Drive, Henderson began in October 2018. The store opening, originally scheduled for December 2019, was first delayed by an extremely windy spring that impacted construction on the 8-storey building.
Then the rescheduled opening date of late February slid into March but before they could open the whole world shut down because of the pandemic.
COMMENT: I felt sorry for Vinod Kumar, the businessman behind Nido. Who could have predicted such awful timing?
Kumar bought his first Mitre 10 in 1989 and was instrumental in the development of the Mitre 10 Mega concept, previously owning Mitre 10 Mega on Lincoln Road. He’s a good operator besieged by bad luck.
I needn’t have worried though. The soft launch was a raging success with customers facing 200 metre queues during its opening weekend. Kumar said sales in the first weekend far exceeded his expectations, with shoppers waiting for up to an hour to get into the store. Customers came from as far afield as Taupo.
Also relieved will be investors in the Maat syndicate that bought the superstore in March 2019 for $59 million.
How New Zealand learned to stop worrying and love government debt
New Zealand is about to embark on a spending spree with little precedent in its history, with the country’s debt forecast to nearly quadruple over the next five years as the government battles the Covid crisis and a deep economic slump.
The opposition warns generations of future New Zealanders will be stuck in a fiscal straitjacket because of the buckets of red ink about to be dumped on the government’s books. The view from the Beehive is that the money needs to be spent to avoid another Great Depression.
Cameron Bagrie, the former chief economist at ANZ, said that New Zealand needs to keep a “squeaky clean public debt” because of the country’s small size and high private debt levels. However, he says the response to Covid-19 was the right one.
“The government needed to go big, leaning on the government balance sheet is the best response in the near-term. I have two concerns. I don’t think we have a well thought out economic plan on the other side and I think people will get increasingly concerned about how we’ll get debt down,” he said.
According to Bagrie, his biggest concern is that taxes will need to go up to finance debt repayment in the future. It could be a defining question for the coming election. National under Muller will promise to do a better job of managing the books and keeping taxes low. It’ll be difficult for Labour to promise the same spending restraint, which could mean less infrastructure investment in the coming years, he said.
Half of retail tenants have not paid their May rent – new report
Only 52% of retail tenants have paid their rent for May, hit by the Covid-19 restrictions on trading in alert levels 3 and 2, a new report shows.
According to Re-Leased’s Covid-19 Rent Collection Impact Snapshot Report, rent payments for commercial property leases up to 27 May were slightly ahead of April but well down on pre-Covid-19 collections.
Industrial was the star performer with 81% of rents collected compared to the baseline average of 90%.
Office was not far behind with a 78% collection rate vs baseline average of 93%.
Retail was the poorest performer with only 52% of rents collected vs baseline average of 87%.
14.5% of May rents had been credited by 27 May, but this varied widely by sector…
- Industrial: 10% of rents credited
- Office: 11% of rents credited
- Retail: 30% of rents credited
Little’s commercial rent relief solution too little too late
The Government has refused to provide any commercial rent relief, instead opting to amend the Property Law Act.
The Government’s package of measures is designed to get landlords and tenants to the negotiating table over rent disputes caused by Covid-19.
Justice Minister Andrew Little said they will insert a temporary amendment to the Property Law Act requiring a fair reduction in rent where a business has suffered a loss of revenue during the Covid-19 lockdown.
Guidance will be provided on applying the clause about a ‘fair proportion’ of rent reduction. The $40m will be used to subsidise the costs of compulsory arbitration for landlords and tenants who cannot reach agreement over rent relief themselves.
Little said it would help ensure the burdens resulting from Covid-19 are shared fairly between landlord and tenant.
The Property Council of New Zealand chief executive Leonie Freeman said she had received many calls from small landlords “beside themselves” over large tenants refusing to pay any rent from the beginning of the lockdown in late March. They are the landlords most under pressure and will undoubtedly welcome the measures.
“If you’re a small landlord and you’ve got a big Australian international retailer in your shop, and they’ve paid no rent since lockdown, and I know some of those have been really stressed out, to my mind this might help them provide a way to get it resolved,” said Freeman.
On the tenant side, chief executive of Retail NZ, Greg Harford, claims that 30% of retail tenancies are embroiled in an unresolved rent dispute since the onset of lockdown restrictions. It is unclear how many of those disputes are unresolved because tenants want a 100% reduction rather than a more equitable sharing of the pain.
COMMENT: This proposal is very late thanks to Labour and NZ First bickering over the detail for the past two months. In the meantime the majority of landlords and tenants have resolved their rent disputes and agreed on rent relief measures.
Leonie Freeman says probably 80% of commercial and industrial landlords and tenants have come to an agreement. In retail, it is understood that about 75% of tenants have been made offers of some assistance and about half have accepted.
Of the remainder, only a portion will be needing rent relief. Supermarkets, dairies and petrol stations, for example, were deemed essential and able to stay open during level 4 lockdown. Let’s hope the measures help the rest.
Do our homes really account for 75% of household wealth?
Ex BNZ chief economist Tony Alexander responds to an article claiming that our homes account for 75% of household wealth. “This is not correct,” he says.
“The article, like so many others, was aimed at giving the impression that we Kiwis are a debt-hungry bunch determined not to save and focussed instead on owning as much property as possible.
“The underlying theme behind the article, and many others driving negative housing commentary, is that gaining wealth through rising house prices is immoral and God will eventually strike down miscreants owning property with a collapse in prices. Those smart-alecks down the street will get their comeuppance.”
In fact, says Alexander, latest Reserve Bank data lists the total net wealth of NZ households as $1.6 trillion, with financial assets comprising $987 billion and housing and land held by households comprising $867 billion. Household debt stood at $232 billion of which $200 billion was for housing loans.
Net financial assets (savings, superannuation, KiwiSaver, shares, etc) at $955 billion easily exceed net housing assets of $667 billion. So much for the claim that most of our wealth is tied up in our homes.
Why is popular media discussion of housing usually very pessimistic?
Writing in his Tony’s Views on 4 June, Tony Alexander says there are probably two reasons.
“First, we humans pay far more attention to negative things and headlines than positive things. It is simply our nature.
“Those people who thousands of years ago assumed that everything was alright outside the cave might have got eaten. Those who would not venture out if they heard a rustle in the long grass lived.
“We are the descendants of those mousy cowards.
“Second, many people believe that wealth made from capital gains is immoral. They believe the gains do not come from hard work therefore they are inherently inferior to wages gained by the worthy people who have made their money through paid employment.
“This value judgement on housing gains distorts their thinking and analysis. They interpret developments affecting housing from the negative side, placing low weight on positive or supportive factors – if they willingly notice them at all.
“A successful investor will take advantage of these two factors. At times like these, long-term focussed investors are incentivised to keep quiet and let the negativism roll. That is because they know negative discussions will lead people to worry and try to reduce their worries by selling their properties or holding back from buying anything.
“The skilled investor will then pick these properties up from the pessimism cannon fodder. These people would have loved the negative comments from QV on Wednesday morning.”
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