We pulled 20 gems from the torrent of property news this week to keep you abreast of the most important insights affecting property investors 16-22 May 2020
Grab a coffee, block out distractions and sit down for a long read in property news this week. I promise it’s a good one…
- What is unique about this recession?
- An optimists view on COVID-19 unemployment
- Government and RBNZ “willing to do all that it takes”
- Auckland house prices will neither collapse nor boom in years ahead
- ANZ talks with forked tongue
- ASB expects 10% fall in retail trade over 2020
- Valuers favour industrial property
- Early days yet for house prices according to valuers
- Valuers’ views on Auckland
- Argosy earnings up 3.8%
- Silverfin sets $1 billion growth goal
- Strong investor appetite for commercial property funds
- Term deposit rates sink even lower
- The best investment advice you’ll ever get
- Landlord’s $15,000 bill after tenant’s neglect
- First-home buyers lose when tenant refuses to budge
- Commercial property rent arrears get worse in May
- Fletcher Building loses $55 million in April – 1,000 jobs to go
- Hotel industry could take 5 years to recover
- 5G paranoia: Who is right, truthers or scientists?
What is unique about this recession
Tony Alexander describes how this recession is unique compared with others in recent decades…
“The unique aspect is that this is a temporary voluntary crushing of the economy undertaken in order to save the lives and long-term health and happiness of tens of thousands of people.
“This recession does not result from a collapse in our export prices, for which we tend to see a 12-month lag before it hits the cities, followed by extended urban weakness while the farming sector eventually starts coming back up again assisted by a belated weakening of the NZD and falls in interest rates.
“This recession does not result from a global financial system shock in response to excessively bad lending and excess construction of houses in many countries, as was the case with the GFC. The unique aspect of that downturn was the seizing up for some 6 weeks of the global credit system and deep worries that many banks might collapse around the world. Worries about a repeat of the Great Depression caused weakness in share prices and sustained declines in house prices, household wealth destroyed and willingness to spend along with it, and sustained lending restraint by banks rebuilding their balance sheets.
“This recession is not because of entrenched high inflation necessitating sustained high interest rates to crush inflation, as happened in New Zealand in the late 1980s. Such inflation fights are often of long duration and much hope of better times is lost by consumers and businesses, which weakens willingness to spend and willingness to hire and invest.
“Which brings us back to this downturn. It does not come about through an income shock or a financial shock or a need to fight high inflation. Only for a short time will it affect the willingness of you and I to spend, and of businesses to hire and undertake capital expenditure. That perhaps is the big difference, more so than the short-term depth of this downturn and the unique shocks to inbound tourism and hospitality.
“Because the worst of this downturn is hitting now and in the next few months, and job losses are radically front-loaded, the recovery will appear much sooner than in previous downturns. The willingness of people to spend and businesses to hire is going to return earlier than in previous recessions, with assistance from the biggest set of fiscal and monetary stimuli that we have ever seen.
“Ultimately then the unique aspect of this recession may not be its magnitude or even the speed with which it has struck. Instead it may be the focus right from the start on recovery – which sectors first, which last.
“My gut feel is that we will reach the light at the end of the tunnel far earlier than in past recessions. That ultimately will drive consumption, new hiring and investment, and that will produce growth through 2021.
“However, this is not to say that underlying unemployment will disappear quickly. That is something different. The inbound tourism sector has gone and unless businesses believe Kiwis will undertake a huge surge in domestic travel, there is no point keeping staff on. The hospitality sector is also experiencing a structural reduction in customer flows with many people likely to avoid crowded locations for potentially years rather than just the next few weeks. That factor, added to the generally high turnover rate of hospitality businesses, will see many closures and many people displaced from the sector.
“Then there is the other structural factor driving higher unemployment. We have entered my predicted period of weeding out of businesses across all sectors, challenged by new technologies, social pressures, finance shortages, etc. The restructuring I figured would take 2-3 years will probably all happen before the end of this year.
“Finally, there is the new structural element of decreased capital costs associated with sustained low interest rates. In recent years businesses have facilitated their growth by hiring people. Now, with the hurdle rate for undertaking capital spending so low, some will embrace greater labour-saving production techniques.
COMMENT: Anecdotally, a friend of mine sells industrial robotics. He’s never had so many enquiries or been so busy.
An optimists view on COVID-19 unemployment
Our unemployment rate will reduce quite quickly later this year, says Tony Alexander. But he says it will still leave a new pool of potentially long-term unemployed people.
“How depressed should we be about this? Maybe not as much as in earlier years when work structures and roles were more rigidly defined.
“Young people may not have much resilience (though they are getting some now), but they are highly adaptable. They know nothing other than the new. New technologies, new ways of shopping, new ways of working.
“They will willingly embrace new roles, set up new businesses from home with minimal overheads, and perhaps ultimately disrupt existing operators in a way we have not seen before.
“So that then becomes a warning to existing companies getting through this okay. You are about to be challenged with the greatest wave of people having a go that you have ever seen.
“If you want to keep up with the ways they will undermine your business model, it would probably be a good idea to hire them or buy out their start-ups as quickly as possible.
“There is ultimately one thing we know which always emerges from crises. A sharp acceleration in innovation. Next year through 2022 will be fascinating.”
Government and RBNZ “willing to do all that it takes”
ASB senior economist Jane Turner says last week’s Budget and Reserve Bank of New Zealand (RBNZ) review confirmed both the Government and the Central Bank are willing to do all that it takes to support the economy through the COVID-19 pandemic.
“We agree that borrow and spend on a massive scale is the best approach right now. Down the line, however, future Governments may have to make some tougher trade-offs.”
Turner says the RBNZ is committed to keeping interest rates low and will purchase $60 billion of (mainly) NZ Government bonds over the coming year (up from the $33 billion previously announced).
“Over recent weeks, the RBNZ’s approach looks to have been more aggressive than across the Tasman, with the RBA starting to taper asset purchases while the RBNZ’s weekly purchase rate remains on full throttle,” says Turner.
“At the margin, this has provided additional stimulus to the NZ economy, with a lower NZD (particularly against the AUD) than would otherwise be the case.
“The RBNZ’s Quantitative Easing programme looks to have been effective in helping to lower wholesale interest rates, but the RBNZ does not look to be fully satisfied with the flow through into retail interest rates. Expect closer scrutiny on borrowing rates from the RBNZ going forward, and if ‘jawboning’ alone does not work, there is potential for the RBNZ to dig further into its bag of tricks.
“Meanwhile, the Government has readied itself for war in the 2020 Budget, with the $50 billion COVID-19 Response and Recovery Fund (CRRF) package to support employment, households and firms.
Whilst Turner says ASB agrees with borrowing and spending on a massive scale for now, it is important that the Government “articulates a plan that will help shape the future of the economy. The Treasury may not be able to get away with using flattering economic forecasts for long.”
She also says that “future Governments may have to make some tougher trade-offs” as a result of the decisions being made now.
Auckland house prices will neither collapse nor boom in years ahead
Bob Jones is always entertaining, always astute. Here are his views on the prognosis for Auckland house prices…
“Shades of 2008. Back then after the banking crisis every economist, as now, wrongly predicted a massive price collapse in Auckland house prices. Some such as Bernard Hickey and Shambles put their money where their mouth was, sold up and shifted to Wellington, in the process blowing small fortunes.
“As I said on television, back then, Auckland was the fastest growing city in Australasia, there was a huge shortage of Auckland houses and prices are set by supply and demand, ergo, far from collapsing they were on the cusp of a boom, all of which duly occurred.
“So here we go again. But we don’t have massive immigration as back then. More pertinent the Reserve Bank has removed the minimum deposit stricture while interest rates are at an all time historic low. It’s a buyer’s dream situation.
“The government’s efforts to partly underwrite small business victims of the ill-considered lockdown by partly guaranteeing interest free bank loans has been both a failure and exposed their naivety. That’s because banks are rejecting most overtures, knowing many of the applicants are irretrievably ruined. They naturally don’t want the time-consuming money-losing mopping up mess on their hands.
“On the other hand they’re eager to provide house mortgages. I suspect residential agents have a very good year ahead of them. But once balance is restored, without large scale immigration, there will not be the price boom of recent years.
“One cautionary note. The unquenched demand is for family homes. On the other hand we’re looking at a glut of apartments in Auckland, developers as is their age-old wont, having hugely over-supplied the market. It is Auckland apartments and not houses which will see a value collapse. Apartment purchasers who are patient and wait 6 months or more will buy well.”
ANZ talks with forked tongue
ANZ cut its 1-year mortgage special to 2.79%, lower than its main rivals and matching the lowest 1-year rate anywhere. It cut most other fixed home loan interest rates too.
In a separate article, ANZ is reported to be sticking with its forecast that house prices will fall 10% to 15% this year, and says there is a risk they could fall by more.
ANZ says the regions most vulnerable to price falls are Queenstown-Lakes, Mackenzie, Kaikoura, Westland, Taupo and Thames-Coromandel.
Their report also said residential rents would also come under downward pressure. “Rents will also be affected by lower demand and reduced ability to pay,” it said.
“More supply coming on stream due to short term rentals sitting vacant will also see the supply-demand balance shift and put rents under downward pressure. This will become clear as new tenancies are entered into and in some cases where tenants negotiate down their rents to a level they can afford. Landlords in some regions may not have much negotiating power, given the increase in rentals available,” the report said.
COMMENT: What is the ANZ trying to do? On the one hand they predict massive price drops for residential property, but on the other hand encourage people to borrow more with substantial interest rate cuts. Who would be crazy enough to borrow to buy a house only to see a 15% drop in value in the near future wiping out any equity?
Either the ANZ feels very confident about the market, or it wants to oversee a massive sell down through countless mortgagee sales. If they believe in their predictions, they should be discouraging people from borrowing and ending up losing their homes.
ASB expects 10% fall in retail trade over 2020
Easing restrictions on non-essential retail and pent-up demand should trigger a retail rebound, but ASB still expects a close to 10% fall over 2020, given widespread job losses and the weak economic backdrop.
“We expect Q2 to be the low-water mark for the retail sector, followed by a modest recovery. Widespread job losses and the weak economy are expected to encourage spending restraint with discretionary and durables retail likely to remain under pressure over 2020 and potentially into 2021.”
ASB reports a “milder than expected fall in Q1 in retail trade volumes,” but that “retail spending looks to have run into a brick wall in Q2 as the COVID-19 outbreak and associated restrictions took effect.”
“The easing of restrictions and pent-up demand is expected to see retail volumes rebound in the second half of the year, but we expect overall retail volumes to be around 10% lower over 2020.
“We expect consumers to rein in discretionary and durable spending and to look for cheaper alternatives elsewhere.”
Valuers favour industrial property
Tony Alexander recently conducted a survey of valuers to get more insight into the residential property market. He also received very good insight on commercial property. The following quotes are representative…
- Properties for purchase by investors seeking yield away from low interest rates have been in very short supply and this will limit overall price declines.
- Nonetheless, declines are expected in rents for retail and hospitality space plus B and C grade office space. A-grade office space is expected to see rent levels hold.
- General client feedback highlights positive sentiment exists with respect to industrial property and concerns increasing around retail, hospitality and tourism orientated property.
- Industrial property values are likely to be the least affected because of perhaps a higher demand for warehouse space associated with an increase of product purchases online. Offices may be moderately affected as firms may not require the same amount of accommodation as in the past due to the ability of some staff to work from home. Further, while the virus risk is still with us firms will not want all staff in the office together because if one staff member is infected this could sweep through the majority of the office resulting in quarantining and the loss of productivity.
- Well-capitalised investors are expected to continue to seek out quality properties with secure tenants on long-term leases. But extra deep scrutiny will be undertaken of tenants in grades B and C office space.
- Industrial property rents in Auckland are seen holding up along with their values due to shortages of properties and anticipation of some manufacturing reshoring along with increased demand for storage space. There is some evidence of 2-3 month rent holidays being offered to entice tenants.
- Tenant covenant is key to value. Properties occupied by Essential Service businesses have (at least) maintained their attractiveness, particularly prime industrial assets.”
- Majority of landlords have worked well alongside tenants. Generally speaking, most I have talked to have agreed a 50% rental abatement for the lockdown period.
- To reflect uncertainty and increased risk premiums in the market, valuers are typically softening capitalisation rates slightly (0.25% to 0.5%) and adjusting for rental abatements in the short term.
- The family wealth offices are waiting on the sidelines for business failure to come through as an opportunity to acquire high quality [commercial property] assets at a discount, or more likely secondary assets at such a deep discount that they feel it’s a no brainer. Either way this is viewed as a once in a life-time opportunity (after the last one, being the GFC) to acquire assets and create long term wealth.
Early days yet for house prices according to valuers
Tony Alexander’s survey of valuers mentioned above resulted in the following general themes…
- Valuers base their calculations of a property’s likely market value on the basis of data – actual transactions with adjustments for the particular characteristics of the relevant property. But with so few transactions they generally struggle to as yet gauge the extent to which prices have or will alter.
- Very few transactions have occurred, but for those which have prices have barely budged from pre-Covid levels. But the “heat” has gone out of previously very strong markets and sales prices are tending no longer to be well in excess of expectations as had been happening.
- There is a feeling that the main price effects may not be seen for up to six months.
- No real evidence exists as yet of properties being dumped by vendors desperate to sell at whatever the market will bear.
- A number of buyers in negotiations before lockdown have stepped back, waiting to see what happens with prices, or concerned about their personal financial situation.
Valuers’ views on Auckland
The city has been flat for four years while incomes have been rising. This will act as an insulating blanket for current prices against the effects of rising unemployment and temporarily reduced population growth.
One valuer is recommending basing valuations on those during the quieter months of 2019 rather than months up to March when Auckland was heating up again after a three-year lull.
Land prices are expected to fall with banks pulling back from financing land development.
Argosy earnings up 3.8%
Despite the market downturn arising from the Covid-19 pandemic, Argosy Property Ltd chair Mike Smith said today the company had significant opportunities.
“The board’s message to stakeholders is to look through the near-term challenges we are facing.”
Smith said Argosy’s business was resilient and supported by a sound capital and portfolio position. Accordingly, based on current projections for the portfolio, the board had confirmed expectations of a 6.35c/share full-year dividend for the year to March 2021.
Chief executive Peter Mence said Argosy had provided some assistance to tenants since 31 March to counter the impact of lockdowns, primarily via deferrals or rent abatements:
“Including the Albany Lifestyle Centre, Argosy has provided for about $2.8 million in rent abatements for April & May (since year end), for tenants most in need.”
Overall, Argosy’s net distributable income was up 3.8% for the year to 31 March 2020.
Silverfin sets $1 billion growth goal
Property syndicator Silverfin added four proportionate ownership schemes and an underwritten fund to its portfolio in the last 12 months. It now has $280 milliion of property under management.
Silverfin Capital Ltd has now set itself the ambitious goal of growing its syndication and management portfolio to $1 billion within the next five years.
Strong investor appetite for commercial property funds
A recent Colliers research report demonstrates that there is still very strong investor appetite for well-managed syndication schemes with strong tenant covenants that offer good returns.
Colliers say that in the current low-interest rate environment, unlisted property will remain sought-after given they are income-generating investments which offer secure returns.
Many investors are looking beyond traditional bank deposits due to the downward pressure on returns, and not all are comfortable with the recent volatility of local and global share markets.
Asset prices have risen steadily over the last few years driven by solid occupier fundamentals, low interest rates and competition for a limited supply of properties available to purchase.
Term deposit rates sink even lower
On our NZ Interest Rates Forecast we list the 4 banks that have reduced their term deposit rates since last week. One-year term deposit rates are all clustered around 2.1% to 2.2% except for BNZ at 2.3%.
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The best investment advice you’ll ever get
Michael Carr, a chartered market technician and financial editor, says about 15% of all publicly traded US companies are trading at least 57% below their 52-week highs.
Referring to some investors who blindly ‘buy the dips’, he cites a famous quote when he gives the best investment advice you’ll ever get…
“My investment advice would be not to run into a burning building.”
Carr also says that US stocks that haven’t participated in the recovery yet are best left to the specialists, crazies, long-term opportunists and those without other options. “The same is always true for beaten-down investments,” he says.
“Despite this truth, some investors will always run into burning buildings. Before doing so, you should ask what special knowledge you have that will guide you out of the fire.”
Landlord’s $15,000 bill after tenant’s neglect
A Central Otago landlord is facing a $15,000 clean-up bill after a tenant left his property in a state of filth and disrepair.
Landlord Bob Tovey discovered the state of his Cromwell property on Tuesday after finally getting the mother-of-three evicted for failing to pay rent for more than 4 months.
The stench hit him first, then he found rotten food, dirty clothes, children’s toys, rubbish, cigarette butts strewn throughout the property – inside and out.
Landlord Bob Tovey discovered the state of his Cromwell residential property on Tuesday after his tenant was evicted for failing to pay rent.
“This is disgusting, and she has got three young children. How can you bring children up in this? This is the worst house I have come across in my 20 years of renting for abuse from a tenant.”
First-home buyers lose when tenant refuses to budge
A tenant’s refusal to budge has meant a Wellington couple are likely to lose their first-home purchase – a two-bedroom apartment with a sale-and-purchase agreement that was due to be settled last Friday, May 15.
Commercial property rent arrears get worse in May
Property management platform Re-Leased has published its COVID-19 Rent Collection Impact Report for May. The cloud software provider analysed data from more than 10,000 commercial properties and 30,000 leases in New Zealand to get a snapshot of the rental environment.
Surprisingly, it found that rent collections are worse in May than April. New Zealand commercial property rent collections were down -33% by 5 April. But a month later, rent collections were down -57% by 5 May.
Retail was the worst performing category, with rent collections down -68% on total rent due.
Office was next worst, with rent collections down -55%.
Industrial fared least worst, with rent collections only down -36%.
Auckland performed better than average, with rent collections down -52% compared to the national average of -57%. But even better was Waikato, only down -27%.
The worst regional performers were Northland -62%, Wellington -63%, and Otago/Southland -68%.
COMMENT: Retail and hospitality have been especially hard hit. I expect Otago/Southland’s poor result reflects the impact on tourism-dependent businesses in the region, especially Queenstown.
Industrial has fared the best and validates the focus of Provincia Property Fund on this sector. The quality of Provincia’s portfolio is also reflected in the fact that only 18% of its rent roll was abated or deferred, compared to the 36% average reported by Re-Leased.
Fletcher Building loses $55 million in April – 1,000 jobs to go
Chief executive Ross Taylor said said the company expects to cut its New Zealand workforce by about 10% – 1000 jobs – and by 500 jobs in Australia.
“While there is a lot of uncertainty over the economic outlook, we expect Covid-19 will lead to a sharp downturn in the 2021 financial year.
“We are planning for an environment that will see a shrinking economy, substantially reduced customer demand across all our businesses and sustained lower levels of productivity.”
“In New Zealand, residential consents at the time of the level 4 lockdown were tracking at all-time highs of around 37,000/year. As we look ahead, our base case estimate for residential consents in New Zealand is that they will drop by around 30% to about 25,000 in the year to June 2021.”
“It is imperative that the group is positioned for the expected market downturn, which has meant making some very difficult decisions, including reviewing the number of people it employs.
“Like any business facing much lower revenue ahead, we need to reduce our spending to prepare for these tough times. Our first goal has been to implement cost-saving measures that would allow us to retain as many of our people as possible.
“These include looking hard at our operational footprint, exiting some offices to make better use of the space we have in places like the group’s Penrose headquarters, making improvements to the efficiency of our supply chains so that we need fewer warehouses and depots, and ceasing some unprofitable product lines.”
Hotel industry could take 5 years to recover
40% of hotel rooms are temporarily closed or placed in hibernation with another 40% open but operating with limited inventory and skeleton staff, according to a Colliers survey.
Many closed hotels were looking to reopen once domestic travel is permitted, but some will not open until Q3 2020 or longer depending on when sustainable levels of demand return.
However, the hotel industry’s recovery could be hampered by up to 4,200 new rooms currently under construction, mostly in Auckland and Queenstown. The majority will be completed, although most will face a delay of 3-6 months.
Proposed developments not yet under construction, which would add another 3,425 rooms to the national inventory, are now unlikely to take place, according to Colliers.
Colliers predict that some serviced apartments (which make up 20% of short stay accommodation) will move into the long-term rental or owner-occupier sector, as was evident in past economic downturns.
Colliers’ view is that the recovery will be a gradual improvement over time, with wider demand re-emerging in 2021 and building progressively throughout 2022 and beyond.
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5G paranoia: Who is right, truthers or scientists?
In this excellent article David Farrier looks at the way two conspiracy theories have merged into something very nasty online and into real world violence.
COMMENT: This article is nothing to do with property news this week, but if you’ve heard the 5G conspiracy theories and wondered whether 5G really is safe, I highly recommend the read. I especially recommend you follow the links to articles by the BBC, Forbes, Dr Michelle Dickinson and the Global Disinformation Index at the end of the article. As for me, I’m looking forward to my first 5G phone 📱😁