We pulled 25 gems from the torrent of property news this week to keep you abreast of the most important insights affecting investors. 11-17 April 2020
Grab a cup of coffee, there’s a lot to cover in our property news this week…
- Rent arrears for commercial premises now at 50%
- Former Reserve Bank chair says economy will tank but rebound sharply
- Commercial tenant & landlord support among new relief measures
- Asset Plus cancels dividend for March 2020 quarter
- PFI cancels dividend and earnings guidance until it sees more certainty
- ACT leader says businesses need more information about moving out of lockdown
- Term deposit rates drop lower
- Disgraceful overdraft interest rates
- In the past 6 recessions our economy has shrunk for 4 quarters before rebounding
- V-shaped or U-shaped recovery?
- U-shaped recovery says ASB
- Sluggish rather than V-shaped recovery says Adrian Orr
- ASB says inflation OK for now, but potential deflation looms
- Government must move from fire fighting to an intelligent economic focus
- One in 5 hospitality businesses will close permanently
- $3.2b small business package no help for commercial property
- Australia shows how to do it
- Just 25, he owns 4 properties
- Residential tenants say landlords not helping in crisis
- Kāinga Ora apologises after state housing tenants told rent was going up
- ADLS says emergency rental payments clause helping tenants and landlords
- Here’s where the cheap properties are likely to be in Covid-19 aftermath
- OK boomer, I get it now
- NZ’s Covid-19 response risks making rental crisis worse
- Lockdown ‘final straw’ for many residential property investors
Rent arrears for commercial premises now at 50%
Re-Leased, a cloud-based commercial property management software company, says that 50% of rental payments are in arrears, compared to the 2-year average of only 9.8%.
Retail is the hardest hit sector with 63% of rental payments in arrears compared to a 2-year average of 11.4%.
Offices were the next most affected sector with 56% of rental payments in arrears compared to a 2-year average of 8.1%.
Industrial premises were the least affected, with only 29.9% in arrears.
Former Reserve Bank chair says economy will tank but rebound sharply
Arthur Grimes, senior fellow at economic research institute Motu, professor of wellbeing and public policy at Victoria University, and former chairman of the Reserve Bank, believes the economic downturn will be the biggest one since the 1930s Great Depression, but is optimistic it won’t last as long.
“I think the difference between this one and the 30s is I expect this one to be much more short lived. I’m moderately optimistic that we and the world economy will pull out of this much faster than we did out of the Great Depression. But the short-term downward effect is probably at least as large as the initial significance of the Great Depression.”
Grimes says that once a vaccine is available in a year or so, “I don’t see any major impediment to the world economy rebounding sharply at that stage. In the interim we’re lucky that we’re a commodity producing country. People still want to buy food. We went into this downturn with an extraordinarily strong fiscal debt situation, public debt situation, so we’ve got a lot of leeway to cushion ourselves through it. So even in a year or two’s time, our public debt situation won’t be disastrous.”
Commercial tenant & landlord support among new relief measures
The Government announced new relief measures for small and medium-sized businesses on Wednesday after extending the state of national emergency for the third time on Tuesday, out 7 more days to 21 April.
The Government has already announced $20 billion of support measures, but Finance Minister Grant Robertson said more was needed.
The new measures include:
- $3.1 billion tax loss carry-back scheme (estimated cost over the next 2 years)
- $60 million estimated annual savings to business from changes to the tax loss continuity rules
- $25 million in the next 12 months for further business consultancy support
- Greater flexibility for affected businesses to meet their tax obligations
- Measures to support commercial tenants & landlords.
Asset Plus cancels dividend for March 2020 quarter
Asset Plus, a property fund managed by Augusta, has announced it will not pay a final quarter dividend for the year ended 31 March 2020. Future dividends are up in the air too, with the board saying dividends for the 2021 financial year “will be considered on a quarterly basis”.
In an NZX announcement, Asset Plus explained: “Following the commencement of the Covid-19 lockdown, Asset Plus has received a number of rent relief requests from tenants alongside claims for rental abatement in accordance with lease terms. Given the uncertainty regarding the length of the lockdown and ongoing conditions for the various alert levels, Asset Plus is unable to currently quantify the impact of the lockdown for the 2021 financial year.”
PFI cancels dividend and earnings guidance until it sees more certainty
In its COVID-19 and 2020 guidance update on Wednesday, Property for Industry withdrew all forward-looking statements, including its 2020 full year earnings and dividend guidance.
The total cash dividend for the 2020 year was expected to be 7.65 to 7.70 cents per share, which represents a yield of 3.7% on the share price of $2.06 as at Friday 17 April 2020.
PFI said, “It is our current intention to continue to pay dividends on a quarterly basis to the extent that the Company is in a financial position to do so.”
ACT leader says businesses need more information about moving out of lockdown
ACT leader David Seymour said the Government’s business support packages had only gone so far. The wage subsidy scheme had helped a lot firms carry on and staff remain employed. But businesses had other cashflow issues, with the area of commercial leases a major problem. As it was, landlords, tenants and banks had worked with each other to sort the problems out. This had happened without the sort of government involvement that had occurred in other countries.
“Government has really been missing in action on the big piece of cashflow for a lot of businesses, which is rents and leases.”
Term deposit rates drop lower
ANZ, Kiwibank and TSB have all dropped their 12-month term deposit rates, with all the major banks now clustered around 2.3% to 2.4%.
With people currently driven by fear, money is flowing into bank accounts. This is not the GFC and banks do not have a funding problem, so the need to aggressively compete for deposits is not strong. Expect term deposit rates to go lower still.
See our NZ Interest Rates Forecast page for a full dissection.
Disgraceful overdraft interest rates
While banks hand out a pittance to those with term deposits, their greed with overdraft interest rates is astounding.
MoneyHub says, “Overdraft interest rates and fees are huge, and being in overdraft for an average of $2,000 a year can cost up to $500 in fees and charges.
“Bank overdraft charges differ massively – Heartland Bank charges the lowest interest and fees (10%), BNZ charges the highest (23.70%) for arranged overdrafts.
“Worse still, banks are not transparent with the true cost of an overdraft – many add a ‘customer margin’ to their overdraft interest rates; the lower the margin, the better you are as a customer and the less you pay, and vice versa.”
Interest rates on unarranged overdrafts range from 16% (Heartland) to an eye watering 26.95% (Westpac) and 27.9% (ANZ).
In the past 6 recessions our economy has shrunk for 4 quarters before recovering
Tony Alexander says the ending of the lockdown will lead to an immediate boost in economic activity, but it doesn’t mean our economy will be tracking upward in terms of “we’re growing now so everything is good”.
After the initial surge, he says, economic activity could plateau or even shrink a bit further depending upon how much restructuring businesses undertake in the next 3 months.
Alexander says, “On average over the past six recessions our economy has shrunk for four quarters before going back up. That won’t happen this time – but only because the intensity of weakness in this June quarter will be so great.
“From the September quarter the data will technically show that we are recovering. But the level of activity will remain low and pressure will continue for businesses to change what they do, how they do it, and who they do it for.”
He says many businesses, seeing the Covid-19 crisis as the last straw, will compress the 3-year weeding out period he’s been predicting into the next 12 months. “There’s a reason NZ productivity growth rates these past three years have been so low at 0.4%, 0.1%, then 0.3%. The need for change has been building up.”
Alexander says the shrinkage period might be lengthened if the 6-month mortgage deferral and Business Finance Guarantee Scheme merely delay failure for some home owners and businesses.
V-shaped or U-shaped recovery?
What about the speed of recovery, as distinct from the length of time our economy shrinks? Tony Alexander says, “You’re going to get tired very quickly about the debate over whether we are going to have a V-shaped or U-shaped recovery.”
He says that a Treasury graph showing 6 recessions reveals that 3 had strong recoveries and 3 were drawn out. There is no tendency one way or the other.
“So, if you’ve got any sense, you’ll stop reading this and … not try and pick the upturn timing for your business at all. Just forget it, put structures in place to handle lower average activity than before, then adjust to your particular surge when it comes along.”
U-shaped recovery says ASB
In an economic note yesterday titled COVID-19: Possible paths in an uncertain future, ASB Bank senior economist Mark Smith discusses 3 potential paths for the NZ economy. I’ll only cover the most likely scenario…
“Central scenario. This is close to our core view and consistent with a ‘U’ shaped recovery. A sizeable, but hopefully short-lived economic downturn ensues, with firm closures and job losses despite the best efforts of policymakers. There are moderate falls for NZ house prices. The economy settles into a modest recovery from 2021, with weaker balance sheets, caution and a softer income backbone to temper the rebound.”
“Having a degree of flexibility in your plans is paramount if you want to take advantage of the opportunities that arise.”
Sluggish rather than V-shaped recovery says Adrian Orr
Reserve Bank governor Adrian Orr is emphasising the need for government spending to cushion the blow of COVID-19.
Commenting on the state of the economy, Orr said, “The real driving part of this particular economic challenge is domestic demand around the world.
“That demand – particularly with labour market displacements, the uncertainty around household wealth – will mean that a bounce-back in demand will be potentially very sluggish… rather than a traditional V-shaped bounce-back.
“The most optimistic scenario is where we come out of this very very tight lockdown and we remain out of that lockdown in varying degrees of economic activity… domestic demand will be slow and partial and employment growth will be challenging.”
ASB says inflation OK for now, but potential deflation looms
In a second economic note yesterday, ASB Bank senior economist Mark Smith says COVID-19 represents a massive deflationary shock for the economy and it is likely to push inflation lower over the next 1-2 years. After that, recovering economic activity will push inflation gently higher.
“The impacts of COVID-19 have added another layer of uncertainty to the inflation outlook, with risks tilted to the downside. We expect macroeconomic policy-makers to remain steadfast in their commitment to prevent outright deflation emerging.
“We do not expect the OCR to move above its 0.25% operational low until 2024. It could move lower if this was shown to be feasible to do so.”
Government must move from fire fighting to an intelligent economic focus
So says David Skilling, director at economic advisory firm Landfall Strategy Group and former chief executive of public policy think tank The New Zealand Institute.
Skilling also says Modern Monetary Theory (MMT) is gaining traction. This is the idea that governments do not need taxes or borrowing for spending since they can print as much of their own currencies as they need as monopoly issuers of the currency.
Click the link for the full interview.
One in 5 hospitality businesses will close permanently
The hospitality sector is bracing for a big hit, with one in five businesses doubtful they will survive the lockdown. Restaurant Association chief executive Marisa Bidois said, “When your business has been forced to stop trading, it’s very difficult to continue to service these sorts of cost coming in. This is what we are hearing from members.”
Auckland Chamber of Commerce has surveyed 1,000 businesses and found 30% believe their business will not survive. Chief executive Michael Barnett said most of those were small-to-medium businesses that had no money pool to draw from.
“As well as their rents, they’re going to have overheads like ACC and GST and provisional tax – these are all things that keep going on and have to meet. If they have a limited reserve on them, they’re unlikely to survive,” he said.
$3.2b small business package no help for commercial property
The Government announced a $3.2 billion relief package for small and medium-sized businesses during the COVID-19 pandemic. Included are “measures to support commercial tenants and landlords”.
Justice Minister Andrew Little says many businesses may be finding it difficult or impossible to pay rent if they are no longer able to access their property, and if landlords are not receiving rent, they may not be able to meet their mortgage obligations.
“As a result, the Government will extend the current 10 working day timeframe that commercial landlords may cancel the lease to 30 working days. This will be for both the period the tenant is in arrears before the notice is given, and for the period to remedy the breach.
“The Government will also extend the timeframes for lenders from 20 to 40 working days for mortgaged land, and from 10 to 20 working days for mortgaged goods. This will apply to commercial mortgages and home loans.
“These measures will ensure an orderly process to deal with commercial lease disputes caused by COVID-19,” Andrew Little said.
COMMENT: To paraphrase Andrew Little’s plan… With this new Government rule, commercial tenants have an extra 20 days before they can be thrown out if they can’t pay their rent, and landlords an extra 20 days before the bank can take action if they can’t pay their mortgage.
The immediate problem is that many tenants simply can’t pay their rent, and many landlords can’t pay their mortgage. The Property Council has been lobbying for rent subsidies, but all the package does is stave off D Day for 20 days. Whoop-dee-doo.
Australia shows how to do it
The Victorian government will next week introduce new laws granting $420 million in land tax relief to landlords, to encourage them to “do the right thing” by tenants – with about half of that money expected to go to commercial property owners.
Another $80 million will be spent by the state on direct rental payments to tenants who are struggling to pay their rent because of the impact of coronavirus. The laws will be introduced to State Parliament during a one-day emergency sitting next Thursday.
COMMENT: Andrew Little, are you paying attention? That’s how you do it.
Just 25, he owns 4 properties
A 25-year-old Kiwi investor who initially washed dishes to make a buck has brushed aside fears about the Covid-19 pandemic to buy his fourth property.
Riyaan Mohamed said he backed the property market to rebound quickly from the coronavirus crisis, having officially signed up for his latest property while in lockdown.
It means he will now have a $1.6 million housing portfolio, since buying his first home just four years ago, aged 21.
“If you look around, cafes, restaurants and businesses are struggling, as is KiwiSaver and the share market has got its teeth kicked in at the moment – even pharmacies are struggling,” Mohamed said.
“But property is one thing that is still holding its own and still giving good rent.”
Residential tenants say landlords not helping in crisis
Tenants struggling to pay the rent as the lockdown drags on say calls for landlords to show compassion are going unanswered.
A pause on mortgage payments has not trickled down to rental deferrals for most tenants, with thousands having to request emergency accommodation supplements to get by.
But landlords have bills too, and they can’t help tenants if they’re struggling themselves.
COMMENT: We’re all hurting, tenants and landlords alike. So why do tenants think landlords are a social welfare agency? That’s what Work and Income are for. Sheesh.
Kāinga Ora apologises after state housing tenants told rent was going up
State housing provider Kāinga Ora is phoning 6,000 tenants to apologise after many received letters saying their rent would go up.
That’s despite the government putting a six-month freeze on all rent hikes on 25 March due to the fallout from Covid-19.
Spokesperson Paul Commons said the agency was apologetic and had cancelled the increase for all tenants.
COMMENT: Response has been muted. Imagine the uproar if it was a private sector landlord!
ADLS says emergency rental payments clause helping tenants and landlords
Clause 27 of the Auckland District Law Society (ADLS) Deed of Lease includes a “no access in emergency clause”, which the Property Council warned could lead to widespread non-payment that could devastate the sector.
But ADLS property law committee member Joanna Pidgeon has defended the clause.
“A fair proportion [for payment] needs to be agreed on… [both parties] need to put forward a position and give the evidence to support it and if you have an initial to and fro and can’t agree, then you can go to mediation and arbitration and this can be done online through Zoom.
“You need to not just dig your heels in, but give evidence as to why what you’re suggesting is fair… and that is not just looking at the tenant circumstances, it’s looking at the landlord circumstances as well.”
Here’s where the cheap properties are likely to be in Covid-19 aftermath
In a Stuff opinion piece, Tony Alexander reveals where the good deals will be based on his survey of 250 real estate agents and mortgage brokers.
Spec builders. “Spec builders will be very nervous and were I a buyer looking for a bargain, that is where I would start – a pressured speculative builder.”
Auckland’s inner-city. “Demand for apartments to rent in Auckland’s inner environ has fallen. Were I a first-home buyer looking to get my foot on the ladder, or an investor with a long-term focus, this is one market I would be looking at some months from now.”
Recent buyers. “Some people have bought a property recently but they need to sell their existing house. They know getting bridging finance will be hard to get as banks are devoting few resources to acquiring new customers for the remainder of this year. These people have suddenly become, in property market terms ‘highly motivated sellers’.”
Queenstown and Wanaka. “In Central Otago the housing market is being hit from multiple angles. Central Otago contains many aspirational homes. Demand for these from mainly successful business owners always falls away strongly during a recession. In addition, such businesspeople look to sell such homes to generate cash to assist their businesses.”
“And Wanaka has a long-established history of cyclical section over-supply. The land cost is high, the construction cost per square metre much more than elsewhere. Every cycle in Wanaka, section prices can suffer.”
OK boomer, I get it now
A whole new generation is now gaining an understanding of why the Baby Boomers became property investors over the past 30 years following the 1987 share market crash, says Tony Alexander in another Stuff opinion piece.
“Some young buyers who unwisely had their KiwiSaver funds in an aggressive growth fund have – in comparison with those in a conservative fund – seen their potential house deposit fall away. They will have to hold off buying for perhaps another year.”
But “no one has just woken up to see the value of their housing portfolio down 30% from a few weeks ago as some investors in shares have. There is far greater stability in housing than shares.”
NZ’s Covid-19 response risks making rental crisis worse
“Despite being in the middle of the biggest national crisis our country has faced in over half a century it would appear that ideology still trumps reality within the Coalition Government,” says Ashley Church, former CEO of the Property Institute of New Zealand and now a property commentator for OneRoof.co.nz.
“While the country comes to terms with the economic impact of the lockdown and hundreds of thousands of Kiwis wonder whether they’ll still have jobs and be able to pay their bills, the Government is still pressing ahead with oral submissions to the controversial Residential Tenancies Amendment Bill over a series of days this month.”
“These oral submissions … are in contrast to a multi-party agreement to suspend all business before Select Committees during the lockdown. Despite this, Housing Minister Megan Woods apparently believes that these reforms are of such national urgency that they should be exempt from the accord.”
“Frankly, this is disgraceful. Woods’ focus should be on doing everything she can to make sure Kiwis have a roof over their heads.”
Lockdown ‘final straw’ for many residential property investors
Residential property investors are being hit by a “perfect storm” that is predicted to drive many out of the market.
Rents have been frozen and evictions are on hold for the next 3 months as the country responds to Covid-19.
Tenants can still terminate their tenancies, if they wish, and they can revoke termination notices their landlords have already given them, and they cannot be forced out of a property until their rent is at least 60 days in arrears.
Existing Ma and Pa investors reliant on rental income have pulled back quickly from contemplating new purchases. There is a feeling that on top of legislative changes this will be the final straw for some.
David Pearse of Pukeko Rental Managers predicts a “mass sell-off” of rental properties in the coming weeks.
“I’m already hearing reports of some wanting to sell but having to wait until the end of the lockdown.
“Not only have some seen their rental income drop with no chance of government relief, but there’s a huge concern that the government won’t reverse the lockdown policy of making no-cause terminations illegal.
“It’s like the perfect storm for mum and dad landlords, who are the vast majority, and they can’t see an end in sight.”