Commercial rent collections recover strongly; the businesses hit with permanent value declines & 5 other insights in property news this week…
In property news this week…
- Investore $125 million bond issue at 2.4% interest rate
- OCR forecast to go negative next year
- Commercial rent collections recover strongly
- The businesses hit with permanent Covid-19 market value declines
- Fletcher Building confirms big loss
- New modular housing design goes from ship to site in one day
- The slow demise of a central Auckland backpackers
Investore $125 million bond issue at ~2.4%
Investore Property, a large-format retail property investor, said this week it was seeking up to $125 million from a bond issue to New Zealand institutional and retail investors.
The bonds have a 7-year term and the interest rate is only 2.4%
Investore will be using the money raised through selling the bonds to pay back some of its bank debt. The retail bondholders will become lenders to Investore by buying the bonds.
COMMENT: If 2.4% is lower than Investore’s bank funding rate, they not only reduce their exposure to the bank but reduce their total interest cost as well.
I guess investors win too if the only alternative they’re considering is term deposits at 1.5%, but why would you when Provincia’s industrial property fund offers 6% cash return?
Investore’s bond issue is targeted at retail investors, though, and has a minimum investment of $5,000. So it would appear that 3.6% is the financial penalty for being an unsophisticated retail investor (6% – 2.4% = 3.6%).
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OCR forecast to go negative next year
ASB Bank has changed its OCR forecast view and now expects the RBNZ to cut the OCR to -0.50% in early 2021.
They expect the OCR to remain at this level before the COVID-19 storm passes (potentially as long as late 2022).
They qualify their view by saying the interest rate outlook “is highly uncertain and OCR settings will be conditional on a number of factors”.
ASB says the negative OCR will be launched in conjunction with a Funding for Lending Programme (FLP) that will provide stable, low-cost funding to banks that can be lent out, mitigating some of the adverse impacts of a negative policy interest rate.
“In the interim, we expect the RBNZ to continue to use forward guidance and its expanded $100 billion Large Scale Asset Purchase programme to push yields lower.”
Commercial rent collections recover strongly
Commercial tenants’ rental payments picked up in July, according to a new commercial real estate index developed by Re-Leased Software Co.
The CREDIA Index is updated every month and draws on one of the most extensive and live datasets in the commercial property industry, consisting of over 50,000 leases and 20,000 properties.
Rent paid within 30 days of due date
Cash is king. Receiving rent in full, as quick as possible, is of utmost important to landlords. The following chart shows a big decline during the April and May lockdown period, and New Zealand’s strong recovery relative to the rest of the world…
New Zealand rental collections within 30 days of due date by property category in July were…
- Retail: 84% (down 3% on pre-Covid average of 87%)
- Office: 87% (down 6% on pre-Covid average of 93%)
- Industrial: 88% (down 2% on pre-Covid average of 90%)
- All: 85% (down 5% on pre-Covid average of (90%)
For reference, the average in Australia is 75% and in the UK 47%.
Landlords can abate (credit) outstanding rent that tenants owe due to non-access during the COVID-19 pandemic. This process typically occurs after successful negotiations between landlords and tenants, and a fair and reasonable amount of rental discount has been agreed upon by both parties.
The following chart shows the much higher levels of landlord subsidies given in New Zealand during this period compared to the global average…
COMMENT: The strong rebound in rent paid on time is most likely due to a combination of the government’s quick and decisive action, including wage subsidies, and the high level of landlord subsidies, both of which allowed commercial tenants to regain their footing more quickly than those in Ozland and Borisland.
The businesses hit with permanent Covid-19 market value declines
Tony Alexander says business owners must recognise that Covid-19 is a new, long-term operating environment they must adapt to.
“The profitability of operating a business in the retail, hospitality, entertainment, travel, and tourism sectors, plus those which supply these sectors, has permanently declined for the Covid-19 environment.
“It’s not just the down then up associated with Lockdown 1, and the current return to Level 3 Alert in Auckland and 2 elsewhere. Mainly it’s the acknowledgement that this return up the Alert scale can happen at any time and will almost certainly happen again given the continuing incompetence shown on quarantine management.
“The downside for existing owners of these types of businesses is that their market value has declined.”
Alexander cautions against thinking of business success only in terms of profit and value growth. He says you must add handling and bouncing back from lockdowns into that mix.
Fletcher Building confirms big loss
Fletcher Building, the behemoth building products and construction business, announced its audited annual results on Wednesday. It confirmed a net loss for the year to 30 June 2020 of $196 million compared to a profit of $164 million the year before – a negative turnaround of $360 million.
Despite the loss, the company ended the year with a strong balance sheet – liquidity of $1.6 billion and net debt of $0.5 billion.
However, it is not paying a dividend.
Chief executive Ross Taylor said they had downsized the business “for a market downturn of around 25% in New Zealand and around 20% in Australia, although there is a high degree of uncertainty over the outlook.”
New modular housing design goes from ship to site in one day
The homes have a multiproof consent from the Ministry of Building, Innovation & Employment (MBIE) and come complete with all fittings, finishings and appliances, and are double-glazed and fully insulated.
Neilston Group managing director Tony Houston said the Modul homes represented 3 years of Kiwi product development and design and are the first of 16 new homes to be erected at Hobsonville Point.
What’s the difference between these and other modular homes? “Until now, full-sized modular homes available in New Zealand were constructed from prefabricated components,” Houston said. “A Modul home, on the other hand, isn’t made up of different prefab parts joined together. It’s a single prefabricated unit.”
“By manufacturing these homes offsite, in this case offshore, then transporting them in one simple movement onto their residential site, we can make cost savings – for example avoiding the exorbitant price of building materials in New Zealand [dominated by Fletcher Building] – and pass these savings on to home buyers.
“We can also reduce waste, given around 50% of waste to landfill in New Zealand comes from the construction industry.
“Neighbours and the community face much less disruption. The modules are delivered by truck and crane, and then a small number of tradespeople finish the home and landscaping. Gone are the months of buzz saws or jackhammers or other power tools next door, as well as numerous truck deliveries and other hazards.”
Houston said, “New Zealand has a long tradition of format design and prefab building, but Modul homes take this to a whole new level, both in terms of the quality of design and specification, as well as the efficiency of construction and price point.”
The slow demise of a central Auckland backpackers
A once thriving, globally acclaimed business says it faces an expensive death, wedged between punitive commercial law and government inaction.
Most New Zealanders will have never heard of it, but if you were a young international traveller it was the place to be – the first stop and bustling home base for thousands of tourists embarking on journeys throughout New Zealand.
But it’s likely to be gone by Christmas, with the landlord taking the owner’s house along with it. Everything the owner ever worked for over the last 35 years gone because of the luck of the Covid draw.
I am full of admiration for the exceptionally pragmatic owner of this business. Read his sobering story here…
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