We pulled 19 gems from the torrent of property news this week to keep you abreast of the most important insights affecting investors. 25 April to 1 May 2020
We found both positive news and bad news in the property news this week. First the good, then the bad. Grab a cuppa and settle in…
- Investore $85 million share placement fully subscribed
- LVRs are now GONE!
- OCR won’t go above 0.25% until 2024 at earliest
- Term deposit rates fall again
- Government to provide SMEs with interest free loans
- Covid-19 loan scheme for SMEs a flop
- You are being incentivised to minimise your need for new debt
- Economist predicts house prices to fall at least 10%
- NZ set for long slow recovery, top economist says
- It will take a full 3 years for the economy to fully recover
- Government ponders commercial rent support
- Working from home the new norm
- Working from home puts office sector under pressure
- Augusta forfeits one deposit, second one still at risk
- Winners and losers – industrial, office, retail
- Bleak outlook for retail and offices, not so much for warehouses
- Will we need as many offices in the future?
- Will we need as many shops in the future?
- Let rich foreigners build more luxury homes in NZ
Investore $85 million share placement fully subscribed
Investore Property’s $85 million share placement was fully subscribed on Wednesday at $1.65 per share – 6c above the underwritten floor price.
Investore launched its $100 million capital-raising ($85m share placement plus $15m share purchase plan) after the Overseas Investment Office consented to Stride Property’s sale of 3 large format retail properties to Investore for $140.75 million.
LVRs are now GONE
Effective today, the Reserve Bank has removed mortgage loan-to-value ratio (LVR) restrictions for 12 months.
The decision came after just one week was given for submissions. Despite the short notice, RBNZ still received more than 70 submissions.
All locally incorporated banks who responded were in favour of removing LVR restrictions, noting this will allow them to support customers through the impact of COVID-19.
Some submitters recognised that removing the restrictions might allow more first home buyers to purchase a home.
COMMENT: LVR restrictions were imposed in October 2013. By improving the equity positions of mortgage borrowers, fewer will have to sell their house or default on their mortgage as a result of the current economic shock. Given the counter-cyclical nature of the LVR policy and the current economic conditions resulting from the Covid-19 crisis, now is an appropriate time to remove LVR restrictions.
OCR won’t go above 0.25% until 2024 at earliest
Borrowers rejoice! ASB senior economist Mike Jones predicts interest rates to remain near zero for several more years.
“Central bank policy rates are expected to maintain highly accommodative settings. Given the risks to the outlook we don’t expect the OCR to move above its 0.25% operational lower bound until 2024 at the earliest.
“The OCR could move lower if the RBNZ deemed this to be operationally feasible. Weak global growth, negative risks and the prospect of central bank asset purchases should cap long-term NZ interest rates.”
COMMENT: Term depositors, I’m afraid it’s not looking good for you 😬. But if you’d like 6% instead, I suggest moving your funds to Provincia – our defensive industrial property fund.
Term deposit rates fall again
Kiwibank has dropped its 12-month term deposit rate to 2.3% (previously 2.4%), joining ANZ and ASB at that rate. Expect others to follow soon.
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Government to provide SMEs with interest free loans
The Small Business Cashflow Loan Scheme will provide $10,000 to every firm and in addition $1,800 per equivalent full time employee for firms employing 50 or fewer full-time employees. Loans will be interest-free if paid off within a year, and 3% if not.
Under the rules, the total loan amount that could be borrowed by a sole trader for example would be $11,800 and a firm with 3 full-time staff could borrow up to $15,400, while a 50-person firm would qualify for $100,000.
Finance Minister Grant Robertson said, “It has become clear that the support that is available to our small and medium businesses from banks is not meeting their needs nor our expectations as a government. That is why we have moved to provide this scheme to give some much needed cashflow.”
COMMENT: The banks have failed miserably. See next story.
Covid-19 loan scheme for SMEs a flop
Small businesses say the government’s loan guarantee scheme to help them survive the Covid-19 pandemic is failing miserably.
Numerous reports are surfacing of SMEs being unable to access the crisis funding because the banks are treating it as normal commercial lending and showing no leniency.
Anthony Glucina, managing director of Auckland industrial instrumentation maker Define Instruments, said the BNZ told him he would have to put up his house and give a personal guarantee if he wanted a loan under the scheme. Taking out a loan under these conditions would be worse for him than not doing it, Glucina said.
COMMENT: Despite the Government guaranteeing 80% of the loan amount to small and medium-sized businesses under the Business Finance Guarantee Scheme, the banks have not played ball. Here’s one report we received…
“I applied for a $30k bank loan as advertised but turned it down flat because they wanted security over everything we owned. Also my accountant said it would take a month to complete the application form attached at a substantial cost. If the loan wasn’t repaid within 3 months the bank could grab the lot. They want an All Obligation Guarantee – a GSA in other words – over my business AND personal assets. How can a business pay back $30k in the middle of a lockdown pandemic within 3 months? The interest charged was 16%. Useless and dangerous! This should be exposed!!!”
Article link [paywall]
You are being incentivised to minimise your need for new debt
Don’t lightly sign up to the Business Finance Guarantee Scheme (BFGS), says Tony Alexander.
“The BFGS is a good idea. But the government is taking on a whole new set of risks it is not used to by guaranteeing 80% of the extra money you will borrow for up to a three-year period. So, they are requiring that banks fully secure all that money over your assets, with personal guarantees if needed.
“Be prepared to give up that security if you want the extra money. And also, be prepared for your bank to demand extra security for the debt you already have with them as well.
“The signal in these rules is clear. You are being requested to give the deepest consideration to your ongoing profitability and ability to survive a weak economy than ever before. You are being incentivised to minimise your need for new debt by stripping all but vital expenses from your business.”
Economist predicts house prices to fall at least 10%
House prices will fall at least 10% during the Covid-19 pandemic, according to economist Cameron Bagrie. Bagrie said from looking at historical data, the relaxation of LVR rules would have little impact on the housing market.
“House prices are going to move down, the extent of that move is going to be proportional to how high the unemployment rate moves up.
“If we look at what happened during the Global Financial Crisis (GFC) house prices were down 7-8%, the unemployment rate was up to about 6.7%. This downturn, this recession, whatever you want to call it, is looking a hell of a lot worse than what we experienced during the Global Financial Crisis.
“As a starting point, I would pencil in house prices down at least 10% and what is the Reserve Bank doing by relaxing Loan to Value ratio restrictions? It’s a marginal tweak, it’s a little bit of support, it’s going to help that marginal buyer that probably has job security but doesn’t have a high deposit going to get into the market. Is it really going to change the fortunes of the property market? The answer is no.”
Bagrie said both buyers and sellers get spooked out of the housing market during a downturn.
“There’s a lot of talk about the banks having money to go around but the bottom line is that your banks are going to want to make sure that they’re going to get their money back.
“It’s all about credit risk in the current economic environment, so the bottom line is that if you’re going into a bank and asking for a loan today, you’re going to get asked more questions than what you were asked three to four months ago because the economic environment has fundamentally shifted.”
NZ set for long slow recovery, top economist says
Cameron Bagrie, managing director of Bagrie Economics and a former chief economist at ANZ bank, says all businesses were vulnerable during the lockdown and there will be no fast recovery when it lifts.
“The Government has thrown the kitchen sink at this thing, but a lot of businesses are not going to make it.”
Bagrie says high unemployment, collapsed businesses, closed borders, and nervous consumers will be among the factors which business owners will need to deal with. As the pandemic crisis eases, he says some business owners will “need to resize themselves for a different climate”, while others will be “completely locked out.”
“Don’t think of this as a short-term blip, it is a fundamental reset of our economy. Bars and eating out will suffer. With unemployment up, house prices will come down and people will feel less wealthy and spend less.
“Everything that relies on discretionary spending will feel it. Both businesses and households will have run down their saving buffer, and will want to rebuild their rainy day fund.”
It will take a full 3 years for the economy to fully recover
As New Zealand emerges out of Level 4 lockdown, attention is inevitably shifting from the extent of economic damage wrought by the lockdown, to the shape of the recovery.
The economy will be generating some big growth numbers as we bounce out of lockdown but they’re only big because the fall was so large. It certainly won’t feel like a strong or V-shaped recovery.
ASB senior economist Mike Jones says, “We estimate economic activity will still only be around 80% of normal in Level 3. The economy will be battling through the headwinds of damaged household incomes and business balance sheets, weak confidence, and a much larger debt burden. The tourism sector will be MIA for some time.”
“We think it will take a full three years before the economy gets back to its pre-COVID starting point. The point here is not be overtly gloomy, but simply to urge caution around the post-lockdown business and investment climate.”
Government ponders commercial rent support
Justice Minister Andrew Little said the Government was considering options to support New Zealand businesses with rent payments.
COMMENT: The Government has already provided businesses with wage support, although supporting businesses was undoubtedly the last thing on their mind – it was all about keeping people employed. But given that wages and rent are the two biggest fixed costs most businesses face, it’s not before time that they consider some form of rental assistance to keep those employers afloat.
The news was met with mixed reaction, however. Click the article link for more.
Working from home the new norm
Many businesses have now discovered that not all business has to be done face-to-face and can effectively be carried out while working from home.
MYOB says, “Technology has enabled many sectors of our business community to successfully transition to work from home, relying on virtual meetings, chat tools and email to manage staff, coordinate operations and contact customers.”
“Most customers have built an online and home delivery shopping habit. And a broad range of service providers have operated well virtually – from financial advice to medical consultations. So, we are unlikely to see them step back from this way of working.”
Working from home puts office sector under pressure
The Chinese virus has shown how, for many, working from home is not the productivity suck many bosses feared.
In fact, the National Business Review has found working from home so agreeable it has put its entire office space up for sublease. Many more will undoubtedly do the same, saving considerable cost in the process.
Others will downsize their offices by encouraging more flexible work arrangements, or perhaps because the business has shrunk.
The office sector of the commercial property market will face a significant headwind over the coming few years.
Augusta forfeits one deposit, second one still at risk
Augusta Capital Ltd has forfeited the $4.5 million deposit on its failed purchase of the Albany Lifestyle Centre.
Augusta has also won an extension of settlement on a second property intended for the new Augusta Property Fund, but if it doesn’t settle that second purchase it stands to lose another $4.5 million.
Over the last 4 weeks, Augusta’s share price has risen from 81c on 3 April to 90c on 21 April, and was back down at 82c yesterday. The shares plunged from a peak of $2.175 on 20 February.
Winners and losers – industrial, office, retail
Fisher Funds, which owns office, industrial and retail properties on behalf of clients, went through a revaluation round of the properties at the end of March and the result is in line with trends reported by others.
Frank Jasper, chief investment officer, says “We’ve seen valuations in retail come under pressure. Obviously retail assets are an area of problem right now, and we would expect rents for the next little while to be essentially zero, and for there to be a bit more pressure on rents going forward.
“Office valuations have been stable to down a little reflecting some of those issues.”
“On the industrial side demand is very strong. If you think about the move to online shopping and online commerce, the demand for distribution assets, for industrial assets, is probably up. So [there are] winners and losers as a result of this.”
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Bleak outlook for retail and offices, not so much for warehouses
The problems faced by commercial property landlords will probably get worse and last for much longer than the current lockdown, according to credit ratings agency S&P Global Ratings.
On Tuesday ratings agency S&P Global Ratings assigned a negative outlook to 27% of Australian and New Zealand listed REITs, with many shopping centre landlords expected to be hardest hit as retailers demand rent waivers, deferrals, or concessions to ride out a recession.
The problems will last for much longer than the current lockdown too, with S&P expecting the pandemic to accelerate a structural shift toward e-commerce and remote working, undermining retail and office REITs irreparably but there could be a bright spot for owners of warehouse space.
Will we need as many offices in the future?
Around the world there is an expectation that people’s newfound ability to work from home will lead to a continuation of this trend when “normality” returns. This is widely expected to lead to reduced demand for office space in city centres.
Tony Alexander says, “This will place downward pressure on the rents able to be charged by CBD building owners and that will reduce the valuations for such buildings. For the next few years very few new buildings in CBDs are likely to be built around the world.”
Will we need as many shops in the future?
It’s not just CBD office demand that will decline, according to Tony Alexander. “Businesses are creating new online retail offerings and that is likely to lead to reduced demand for retail space.”
“This is something which may not be all that visible in prime shopping locations and in the main cities. But it will worsen already challenging retail precinct appearances in regional locations.”
Let rich foreigners build more luxury homes in NZ
Rod Drury, the founder of accounting software company Xero, suggests we encourage rich foreigners to build luxury holiday homes in New Zealand as a way to stimulate the economy.
Drury’s ideas, presented at Parliament’s Epidemic Response Committee meeting, echo Sir John Key’s thinking reported in last week’s Property News This Week.
Drury said it wouldn’t need to be in all parts of the country, with areas like Queenstown, parts of Auckland and the Tukituki Valley in Hawkes Bay being obvious spots.
“It is not competing with places that most New Zealanders would usually buy and I think the diversity by having those interesting people here and we can use their networks is pretty compelling,” he said.
The Green Party, predictably, tried to turn it into a binary ‘rich vs poor’ argument, with co-leader Marama Davidson saying, “Why would we focus the attention for our construction sector on building luxury holiday homes for billionaires when we’ve still got a housing crisis in New Zealand, shouldn’t we be instead focused on building affordable housing for New Zealanders?”
COMMENT: Marama, if we don’t build luxury houses in Queenstown, does that mean those luxury house builders will sell up and move to Auckland to build affordable housing instead? No, I didn’t think so. It’s nothing more than daft politicking at the nation’s expense.
The idea is also very unlikely to gain traction with the Government, which has already passed a ban on foreign buyers. That was further concreted by Prime Minister Jacinda Ardern who brushed off the idea at a press conference.
COMMENT: Ah well, you can’t stop the politics of envy triumphing over rational thinking.
That’s all for property news this week. Enjoy your weekend!