We pulled 8 gems from the torrent of property news this week to keep you abreast of the most important insights affecting investors. 4-10 April 2020
In property news this week…
- The global coronavirus recession
- One of the buying opportunities of a lifetime
- Wondering if your business must pay rent? Look for clause 27.5
- Kiwi Property cans dividend, cuts pay
- Tenant mix supports Provincia dividend payout & Wiri acquisition
- Tony Alexander’s gauge on residential intentions
- Commercial real estate values, as a crisis unfolds
- Government sneaking controversial law reform through while you are distracted by Covid-19 crisis
The global coronavirus recession
An economic research note published by Nordea Bank looks at 3 recovery scenarios for the global economy. Their baseline (most likely) projection is a U-shaped scenario with a deep shock and some quarters of very low activity before the recovery takes hold in 2021.
Nordea’s analysts also cover a more optimistic V-shaped scenario with a sharp downturn and faster recovery, and a more pessimistic L-shaped scenario with a lengthy downturn.
They say the initial shock to global economic activity under the baseline scenario will be “probably at least comparable to the two worst quarters during the global financial crisis”.
“Nevertheless, the recovery will be strong once it takes hold. Large-scale fiscal and monetary policy measures have been implemented swiftly and are likely to keep most of the big economies intact, paving the way for most sectors to return to normal activity relatively fast. Pent-up demand is likely to be unleashed after many weeks of lockdown.”
“We expect global growth to be around -1% in 2020 followed by +5.5% in 2021 in the U-shaped baseline scenario. That is 3.8% points lower for 2020 than in our Economic Outlook from late January, showing just how fast things have evolved.”
One of the buying opportunities of a lifetime
Wharton professor of finance Jeremy Siegel thinks the coronavirus-driven slump is laying the foundation for a massive bounce back. He pointed to the strength of the US economy before the market plunge and said a sharp reversal may be in order, but “fear will continue to drive this” in the short term.
COMMENT: Whereas Siegel is talking about stocks, we see the same scenario with commercial property. During the 2007-08 global financial crisis, commercial property in New Zealand sold at ridiculously attractive yields – it truly was the buying opportunity of a lifetime. Provincia Property Fund will be on the prowl over the coming year for similar investment opportunities.
Wondering if your business must pay rent? Look for clause 27.5
Businesses in lockdown are looking to a previously little-considered clause in many commercial lease contracts which makes it legal to not pay some or all of their rent.
If you are a commercial landlord with debt to service and trying to work out how much rent you can charge for your locked up building, or a commercial tenant stuck at home and wondering if you should pay all, some, or none of your rent, click the link to read Newsroom’s excellent summary…
Kiwi Property cans dividend, cuts pay
Kiwi Property Group has cancelled its final dividend for the year and cut directors’ and executive pay by 20% and frozen salary increases.
In an update on Monday on the ongoing disruption caused by the Covid-19 pandemic, chief executive Clive Mackenzie and chair Mark Ford said: “It is clear the pandemic will have a material impact on the company’s forward-looking performance & rental receipts.”
“Effective immediately, non-essential capital expenditure projects have been put on hold until there is greater clarity about the future trading environment. All operating expenditure has been reviewed and discretionary spend will be stopped where possible.”
Tenant mix supports Provincia dividend payout & Wiri acquisition
Provincia Property Fund Ltd says about 85% of its rental income is from tenants who provide essential services and will therefore keep operating. Supported by that, the commercial property fund manager is going ahead with a dividend payout and continuing with a $10.45 million Wiri acquisition.
Managing director Carl Burling said the fund manager had completed stage 1 of its Covid-19 rental risk assessment, including discussions with every tenant: “This gives Provincia strength through the level 4 lockdown period and, as a result, the dividend for the March quarter will be paid in full at 6%.”
Tony Alexander’s gauge on residential intentions
Former BNZ chief economist Tony Alexander surveyed 240 real estate agents and mortgage brokers on how they see the Covid-19 real estate market.
Most vendors and buyers are taking a wait and see attitude. Buyers are anticipating lower prices, but many have left the market, especially first-home buyers. They’re worried about loss of KiwiSaver funds, jobs, and incomes.
Vendors not needing to sell are also leaving the market. Small investors are deeply worried about rental income losses.
The anomaly group, though, is professional investors, some of whom have been inactive for some time. They are contacting agents anticipating bargain purchases in coming months.
Commercial real estate values, as a crisis unfolds
A recent PricewaterhouseCoopers discussion paper on property valuation fundamentals in the context of COVID-19 discussed various segments of the commercial property market.
They say a large proportion of New Zealanders have always been wary of the equity markets (including Listed Property Entities (LPEs)) and given recent events and the low interest rate environment, demand for syndicated product might be expected to continue.
But they also point out that single tenant risk is typical in this sector, and that the quality of syndicated product varies from one syndication to another.
COMMENT: This is what differentiates Provincia Property Fund, which is an open-ended PIE fund rather than a syndication. Provincia investors’ money is diversified across all the industrial properties in the fund, and becomes increasingly diversified as more industrial properties are acquired.
The PwC discussion paper goes on to say, “Sub markets are likely to react differently; tourism assets and student accommodation have borne the initial brunt of the crisis due to international travel restrictions, and the other more traditional retail, office and industrial sectors are now experiencing the consequences of the nationwide lockdown.”
“Industrial assets tend to exhibit, over the long term, the least value volatility, so this sector could be expected to be relatively less impacted by COVID-19. Interestingly, as at the date of this paper two of the industrial focused LPEs on the New Zealand NZX are trading close to or at a premium to NTA.”
“Expect a flight to quality and assets underpinned by strong cashflow, consistent with what was observed during the Global Financial Crisis (GFC).”
“The deep discounting of equities could lead to the refocus on tangible assets (such as real estate), as occurred post the 1987 share market crash, even though interest rates were structurally higher at that time.”
[Updated since last week’s item of the same title]
Government sneaking controversial law reform through while you are distracted by Covid-19 crisis
Housing Minister Megan Woods sent a letter to landlords and tenants on 27 March saying, “A motion to suspend all non-essential parliamentary business has/will be passed, including suspending all the business currently before select committees.”
But on Tuesday 7 April, NZ Property Investors Federation (NZPIF) received an email from the Social Services and Community Committee saying oral submission hearings on the Residential Tenancies Amendment Bill will be going ahead on the mornings of April 15,17,22,24, and 29 but that, due to the lockdown, they will be held using the Zoom video-conferencing platform.
NZPIF executive officer Sharon Cullwick says, “There’s a lot of opposition to the Government’s proposed tenancy law reforms. It seems pretty sneaky to us to try push through these major reforms through at this time when most people’s attention is firmly fixed on the Covid-19 crisis.”
The situation has also left her questioning why the hearings on the RTA Bill will still be going ahead during the lockdown period, despite the previous announcement that all non-essential business currently before select committees would be suspended.
The Select Committee email of 7 April also says that submitters who want to make an oral submission must send a reply confirming they plan to do so by midnight 8 April 8. WTF!