The $3,000 per week Emergency Accommodation rort. Where does all the printed money go? And 12 other insights in property news this week…
In property news this week…
- The $3,000 per week Emergency Accommodation rort
- Where does all the printed money go?
- Strength of industrial property highlighted by recent sales
- Ready for a 1.5% mortgage rate?
- Office Max to close all 14 retail stores, go online-only
- What will happen to all the empty office space?
- While some struggle, others thrive
- Lifestyle block sales surge on the back of Covid-19
- 230-apartment village proposed for Esmonde Road’s Harbourside Church site
- MBIE simplifies building code update procedure
- NZIER predicts 3-year recovery for economy following Covid-19
- If we are in a recession, why are house prices so buoyant?
- Housing confidence highest since beginning of 2012 boom
- Will house prices drop when mortgage deferrals end in March?
I have some good, thought-provoking articles for you in property news this week, so grab that cuppa and enjoy your read…
The $3,000 per week Emergency Accommodation rort
A Newsroom investigation reveals a Ministry of Social Development initiative to provide emergency housing made the housing crisis worse and enriched a small set of landlords and real estate agents.
A former Harcourts property manager in South Auckland has blown the whistle on an emergency housing scheme where a group of landlords were paid up to $3,000 a week by the taxpayer for “marginal to uninhabitable” private rentals.
When the landlords ran out of houses they turned to real estate agents who procured vacant properties – allegedly without the consent of the people who actually owned them.
The Ministry of Social Development has admitted the scheme made the rental crisis worse – as people took rental properties off the market and used them instead to rent out to MSD to earn thousands more.
At one point, properties were advertised for sale with a guaranteed weekly income stream of more than $1,000 a week – better than what AirBnB could offer.
COMMENT: This is a classic example of the law of unintended consequences. Good intentions driving misguided actions because those in charge refuse to take advice from those who actually know what they’re doing. We see the same thing happening now with the healthy homes standards introduced last year, and the latest amendment to the Residential Tenancies Act. As always, it’s the very people the hand wringers want to help who pay the price.
Where does all the printed money go?
Ex-BNZ chief economist Tony Alexander says the printed money comes in the form of the Reserve Bank of New Zealand (RBNZ) buying bonds from someone selling the bonds. That investor now has cash in the bank instead of a bond holding.
“They are highly likely to seek another asset to invest in – because they are an investor.
“They will be inclined to purchase assets like shares, commercial and residential property, and maybe farm investment syndicates etc.
“They may also just leave it sitting in the bank earning a rate of return potentially better than the yield they were getting on the lower-risk bonds they just sold.”
Strength of industrial property highlighted by recent sales
One thing Covid-19 has highlighted is the strength and resilient nature of industrial property compared to office and retail. These recent sales illustrate the point perfectly.
First the property types that have fallen out of favour. Investors will only take these properties on if they can get a high yield to offset the greater risk of these types of commercial properties in the current environment…
6 Balm Street, Newmarket, Auckland. Retail premises leased to Karen Walker, in occupation since 2013, for 2 years to October 2021 plus 4 x 2-year rights of renewal. Leased at $83,000 p.a. and sold for $1.1 million at a 7.5% yield. Source
COMMENT: The building did have a low seismic assessment of 36% of new building standard. But still, for such a desirable location, 7.5% is an unbelievably good return on investment.
I believe in better times it would have sold for closer to $1.5 million, representing a 5.5% yield, illustrating the impact of Covid-19 on values. Investors now demand a higher return to offset the greater risk inherent in retail premises such as these.
Unit D3 Interplex Business Park, 63 Apollo Drive, Rosedale, Auckland. Offices leased to architecture firm Archiland for 3.5 years to June 2023, plus a small basement warehouse leased separately to Zeal Builders Ltd for 3 years to December 2022. Leased at $89,400 p.a. and sold for $1.3 million at a 6.9% yield. Source
231-233 Onehunga Mall, Onehunga, Auckland. One sushi shop and one fish & chip shop, each with a 2-bedroom flat upstairs, plus basement storage. Rented at $61,100 p.a. and sold for $930,000 at a 6.6% yield. Source
Now the property types that are in-favour with investors. They’re in such high demand that investors are prepared to accept much lower yields just to get their hands on them…
11B Woodruffe Ave, Henderson, Auckland. A poxy old industrial unit on the back half of a site overlooking railway lines. Sold for $860,000 at a 6.4% yield. Source
COMMENT: You know things are hot when even a poxy unit like this sells at a higher valuation than shops in Onehunga and Newmarket.
Unit 8, 63 Arrenway Drive, Rosedale, Auckland. Warehouse/office unit with dual roller doors, leased to IT business NZ Cloud for 3 years to April 2023 plus 2 x 3-year rights of renewal. Leased at $35,000 p.a. and sold for $609,000 at a 5.7% yield. Source
Unit 1J Woollen Mills, 273 Neilson St, Onehunga, Auckland. Industrial unit in new 26-unit development on the 2.8ha former Cavalier Bremworth Woollen Mills site. Leased to international liquor distribution business Proof & Co NZ Ltd for 5 years to September 2025 at $75,460 p.a. Sold for $1.71 million at a 4.4% yield. Source
COMMENT: If this had sold at the same yield as the Karen Walker premises, it would have fetched $710,000 less. If it had sold at the same yield as the Interplex Business Park offices, it would have fetched $613,000 less. This is the sort of premium investors are willing to pay to get into the security of industrial property.
A sub-segment of retail that is doing well is supermarkets, for obvious reasons. A sub-segment of offices that is doing well is medical premises, for equally obvious reasons. But it is industrial that is the all round star.
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Ready for a 1.5% mortgage rate?
The Reserve Bank is preparing to lend fresh money to banks at negative interest rates from early next year, which would allow them to cut mortgage rates as low as 1.5%, Bernard Hickey reports.
The Reserve Bank has confirmed it is preparing to lend freshly minted money to banks from early in 2021 at negative interest rates to encourage them to lend more to stimulate the economy and boost inflation back up to around 2%.
The banks would be expected to lend more to home buyers and businesses at rates as low as 1.5%, down from over 2.5% currently.
That could in turn boost house prices by another 20% to 30% if other factors such as home building rates, migration and unemployment were unchanged, Reserve Bank research shows.
That $200-300 billion rise in home equity values could, in turn, boost home owner and small business confidence, and bolster spending and economic activity through the wealth effect.
Office Max to close all 14 retail stores, go online-only
Office Max is shutting down all of its retail stores as it transitions to an online-only business.
The office supply company sent an email to its customers on Wednesday saying it will transition to an online-only business when its 14 stores close in October.
The decision comes after a retail review, which found the need for the business to adapt to the challenging economic conditions brought on by the Covid-19 pandemic.
Office Max managing director Kevin Obern said, “A retail review reflected the need for us as a business to make some really difficult decisions now, in order to position ourselves better for the future. The trend to increasing online purchasing, as well as changing office and work practices that have been compounded by Covid-19, means we also need to change and evolve to remain relevant to today’s market.”
What will happen to all the empty office space?
An attendee of a Tony Alexander webinar asked: What alternative uses could be there for thousands of square feet of surplus office space we are going to end up with?
“Just because demand falls for a thing does not mean it sits unused. Its price will fall in order to attract other users,” says Alexander.
Any empty space “will likely be second and third grade office stock. After all, this is what we had seen for many years in Christchurch ahead of the 2011 earthquake.”
While some struggle, others thrive
This Covid-19 recession is unlike others in the way it has impacted sectors unevenly. Some have been hit hard while others thrive. Let’s take a look at a few of the successes…
Spark has managed to shrug off the effects of Covid-19 to post a higher annual profit.
Spark’s net profit rose by 4.4% to $427 million for the year ended June, helped by a revenue gain and a lower tax bill.
Revenue increased 2.5% to $3.6 billion as it reported growth in its mobile services and cloud, security and service management business.
The growth in these areas offset losses brought on by the pandemic in other parts of Spark’s business, which were estimated at $25 million, with falls in international mobile roaming, retail store sales and Spark Sport, which was offered to customers for free as live sport was cancelled globally.
New Zealand King Salmon has reported an improved full year profit, despite sales volumes dropping due to the Covid-19 disruption.
It reported an $18 million profit for the 12 months to June, up 58% on last year, due to increased fair value gains for its livestock. Pricing also held up at 7% more a kilogram than 2019, at $24.54.
NZME has more than doubled its half year profits, after it was kept in the black by the government wage subsidy and lower operating expenses.
Profit for the six months to June was $3 million, compared with $900,000 in 2019.
Chief executive Michael Boggs said it took immediate action to combat the impact of Covid-19.
“NZME’s ongoing focus on cost efficiencies prior to Covid-19 meant we were in a good position as the initial impacts of Covid-19 became clear.
“We moved swiftly to ensure NZME did not just withstand the impacts but was best placed to quickly implement a number of additional initiatives that helped mitigate Covid-19 impacts on earnings. The government wage subsidy also helped us retain roles that are now supporting our recovery.”
Its moves to reduce spending during the pandemic reduced operating costs by $24.6 million, with $20 million of annualised cost-savings expected to be permanent.
Napier Port has reported net profit up nearly 15% to $18.7 million dollars for the nine months to June.
Its revenue was down by 1.4% to $76.6 million, as container and bulk cargo volumes fell during the third quarter as a result of Covid-19, but this has not dented Napier Port’s plans to expand its facilities.
The port’s chief executive Todd Dawson said, “Our expansionary plans are underway so we’re committed to those plans. Obviously, as a result of Covid we’ve taken certain measures to defer costs or reduce operating expenditure wherever we can but those strategic investments such as the development of 6 Wharf are going very well.”
Dawson said the resilience of Hawke’s Bay’s primary sector had given it confidence to keep investing for the future, as the company needed to look beyond the current state of the pandemic.
Since the dip in container volumes during the first lockdown, Dawson said activity was now back to pre-Covid-19 levels.
A2 Milk has posted a record profit, driven by booming sales of infant formula because of the Covid-19 virus.
The company reported an annual profit of $385.8 million compared with $287.7 million last year, as revenue rose by a third and it held margins at target levels.
Its full year revenue was $1.73 billion, with infant formula sales making up more than 80% of that, while operating earnings rose 33 percent $549.7 million.
A week after posting its record profit, A2 Milk announced it has made a non-binding offer of about $270 million for a 75.1% stake in struggling Southland processor Mataura Valley Milk as it looks to expand its infant formula supply.
Ebos has posted a 16% rise in profit as its businesses benefited from a sales boost because of the pandemic.
The healthcare and animal products company owns a wide range of businesses in wholesale and retail pharmaceutical supplies, health supplements such as Red Seal, pet foods and the Animates retail chain.
“As a provider of essential healthcare and consumer products and part of the region’s critical medical supply chain, we have remained operational throughout the Covid-19 pandemic and have continued to serve our customers and provide employment to our employees,” chief executive John Cullity said.
Lifestyle block sales surge on the back of Covid-19
Lifestyle block sales in July were 43% higher than July last year, and was the most lifestyle properties ever sold in the month of July, the Real Estate Institute of New Zealand (REINZ) says.
“For a while now we’ve been hearing stories of people purchasing lifestyle properties as a result of Covid-19 and now we’ve seen this translate in the data,” said REINZ chief executive Bindi Norwell.
“As soon as the country went into lockdown agents started receiving calls from people wanting more space and lifestyle options given people were spending more time at home.
“Now that technology makes working from home so viable, Covid has been a strong catalyst for many people to make the leap they’ve been talking about for years,” says Norwell.
230-apartment village proposed for Esmonde Road’s Harbourside Church site
Auckland development company KBS Capital Ltd (Liu Wei and Xin Xu) said on Tuesday it was seeking resource consent to create a new-generation mixed-use urban village destination, Amaia, on the site of the former Harbourside Church beside Auckland’s Shoal Bay.
The company bought the 2.1ha site at 48 Esmonde Rd from Harbourside Church for $40 million in 2019 and said its total investment to realise the potential of the site would exceed $350 million. It proposes developing about 230 apartments.
The development is expected to take 5 years, creating 250 jobs.
MBIE simplifies building code update procedure
The Ministry of Business, Innovation & Employment (MBIE) has decided to update the building code annually from next year.
The ministry’s Building Performance Team said there would be only two dates to remember: the first Monday in April for the start of consultation, and the first Thursday in November for publication of changes.
Changes will come into effect the following November, allowing for a minimum transition of 12 months so existing projects can be completed and changes incorporated in new projects.
NZIER predicts 3-year recovery for economy following Covid-19
The New Zealand Institute of Economic Research (NZIER) is predicting it will take three years for the economy to recover from the effects of the Covid-19 pandemic.
In its latest Quarterly Predictions released on Wednesday, NZIER said it expects the effects of Covid-19 will persist until 2023, as the latest outbreak has added to existing uncertainty.
“The new restrictions have hampered the recovery in activity seen in recent weeks as New Zealand moved down alert levels. Although retail spending had rebounded in the months following the relaxation of lockdown restrictions, the recent increase in spending has yet to make up for the decline experienced during the lockdown,” NZIER principal economist Christina Leung said.
Leung said businesses were typically more cautious heading into a general election but Covid-19 had added much more uncertainty for businesses, with hiring and investment intentions falling sharply.
If we are in a recession, why are house prices so buoyant?
Ex-BNZ chief economist Tony Alexander says there are many reasons…
- A net migration boom prior to the first lockdown.
- Record low interest rates heading lower and expected to stay down for years.
- Knowledge of housing shortages.
- Removal of LVRs, and first-home buyers expectations that banks will accept smaller deposits.
- Gearing up of money that was previously destined to be spent on overseas travel.
- Most people do not suffer income loss just because we had (and have already excited) a recession.
- A structural shift forward in time of home purchase plans.
Housing confidence highest since beginning of 2012 boom
Confidence in the housing market has reached an 8-year high, according to ASB Bank’s latest housing confidence survey out today.
The bank’s chief economist Nick Tuffley was surprised how quickly the housing market bounced out of lockdown, though noted that there has been an element of pent-up demand to be satisfied.
“For those with job security, buying conditions are buoyed by ever-lower interest rates and the potential to find the right house without being in a boom-time bidding war.”
“The results of our latest Housing Confidence Survey and the prospect of further mortgage rate falls all point to the housing market remaining very resilient – despite the economic challenges that abound.”
Tuffley noted that the state of lockdown had a material impact on people’s perceptions. Prior to the first lockdown, a net 66% of respondents expected price increases – the strongest individual month since ASB started surveying in 1996.
Price expectations then plunged in April and May, the depths of NZ’s lockdown, to a net 38-39% expecting price falls. By July, expectations were back up to a net 12% expecting increases.
“The most durable market throughout this period has been the North Island outside of Auckland. Not only was the rest of the North Island carrying more price optimism into the lockdown disruption, it has been leading the charge out.
“Over the month of July price expectations in the rest of the North Island recovered to net 25% positive, with responses in the rest of the country ranging across net 1% to 6% expecting prices to increase over the next year.”
A good time to buy a house. The survey shows a net 21% see now as a good time to buy a house, a sharp lift from the net 1% saying it was a bad time to buy in the previous survey.
Will house prices drop when mortgage deferrals end in March?
Tony Alexander was asked: What is the outlook for house prices in March 2021 after the delay to mortgage deferrals comes off and unemployment has risen to 10%?
“First, unemployment may not rise to 10% and even if it does the trend by then will be downward.
“Second, as I have been pointing out for many months, most (not all) people losing their jobs because of the fight against Covid-19 are in the services sector on low and variable wages. They tend not to be home owners.
“Assisted by low interest rates I anticipate average house prices rising from early-2021 if not sooner.”
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