Is the office dead? Bank term deposit rates continue their inexorable decline. And 7 other insights affecting investors in property news this week…
In property news this week…
- Manufacturing activity hit two year high in July
- July house sales defy expectations
- Reserve Bank expands money printing program by $40B
- Bank term deposit rates continue their inexorable decline
- Precinct stays profitable despite slashed revaluations
- Centuria close to completing Augusta takeover
- Is the office dead?
- Is retail dead?
- Impact of Residential Tenancies Act changes
Now that you know what you’re in for, grab a cuppa and enjoy our curated property news this week…
Manufacturing activity hit two year high in July
Activity in the manufacturing sector hit its highest level in more than two years last month, driven by pent up demand, but jobs are still being lost and a slowdown looms with the resurgence of Covid-19.
July house sales defy expectations
The number of residential properties sold in July across New Zealand increased by 25% from July last year. It was the highest number of properties sold in a July month for 5 years, according to the latest data from REINZ.
For New Zealand excluding Auckland, the number of properties sold increased by 21.5% compared to July last year – from 4,328 to 5,258 – the highest for the month of July in 15 years.
In Auckland, the number of properties sold in July increased by 30.3% year-on-year – from 1,992 to 2,596 – the highest for the month of July in 5 years.
All regions, bar Gisborne and Marlborough, saw a year-on-year double-digit percentage increases in sales volumes – the first time we’ve seen this since April 2016.
COMMENT: I suspect this is simply due to post-COVID pent-up demand, but we need a few more months worth of data to be sure.
Reserve Bank expands money printing program by $40B
In its latest statement on Wednesday, the Reserve Bank’s monetary policy committee held the official cash rate (OCR) at a record low 0.25% as expected. Less expected was the increase in quantitative easing [money printing to you and me] of $40 billion.
The central bank’s Large Scale Asset Purchase (LSAP) programme has been expanded from from $60 billion to $100 billion “so as to further lower retail interest rates”.
It said it was ready to roll out more measures if needed to support the economy, including a negative OCR and funding retail banks directly at near-OCR (a Funding for Lending Programme).
“The faster return to social norms and a higher proportion of employees working from home has seen output and employment recover sooner than projected in our May Monetary Policy Statement,” says Adrian Orr, governor of the Reserve Bank.
But global economic disruption caused by the pandemic is persisting and the outlook is uncertain.
“Such uncertainty is stifling household and business spending appetites, as highlighted in confidence surveys,” says Orr, adding that the risks were to the downside.
“International border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions.”
COMMENT: Get ready for new cuts in bank term deposit rates.
Bank term deposit rates continue their inexorable decline
On 30 July 2020 ex-BNZ chief economist Tony Alexander said, “Every week brings some new, small, declines in term deposit rates as banks seek to build their interest rate margins to try and offset the losses they know they will eventually book from business failure and debt restructuring associated with this crisis.”
The average 12-month term deposit rate is now 1.51%. One year ago it was 3.02%.
A superannuitant whose only source of income is the pension and interest on a $1 million term deposit would earn a pitiful after-tax income of $12,457 p.a. on that $1 million deposit. Ouch.
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Is the office dead?
Not exactly. However, there’s no denying that flexible working, which was already gaining momentum, will be more and more popular in the future.
The ability to work remotely helped to keep the wheels of the economy turning even amongst strict lockdowns. Were it not for this, either the economic fallout, or the human toll, of COVID-19 could have been much worse than it will be.
COVID-19 highlighted the need to have resilient technology that enables flexible working. Companies that had flexible, agile, cloud-based technology were much more able to adapt than those that didn’t.
We’ve consequently seen a surge in demand for cloud-based technology offerings which should continue.
“We’ve seen two years’ worth of digital transformation in two months,” says Microsoft CEO Satya Nadella.
Is retail dead?
No, it’s just moving online. For both consumers and businesses, recent events have highlighted the importance and convenience of e-commerce.
People that had not historically bought goods online, but did due to lockdown restrictions, will continue to value the ease and convenience of goods being delivered to their door.
Businesses have had to adapt, expanding their online presence to improve customer experience.
While this structural trend is not new, e-commerce will continue to rise in importance over the coming years. E-commerce currently comprises 14% of global sales, having more than doubled over five years.
Before COVID-19, this was forecast to exceed 22% of total sales in the next 5 years, which may now be conservative.
Precinct stays profitable despite slashed revaluations
A $228 million reversal in valuations slashed Precinct Properties’ profit for the June year, far outweighing the small increase in property income.
The NZX-listed office and retail property owner and developer ended the year with profit down 82% at $35.1 million.
Chief executive Scott Pritchard said completion of Bowen Campus stage 1 in Wellington and Commercial Bay in Auckland, both fully leased, boosted the portfolio with high quality assets occupied by a mix of Government and investment-grade office occupiers, coupled with some of the best global and local retailers.
Centuria close to completing Augusta takeover
Australian funds manager Centuria Capital Group moved to compulsory acquisition of the remaining shares in takeover target Augusta Capital Ltd this week after reaching 96% ownership when its offer closed on Monday.
Centuria’s original takeover bid was at $2 per share before the Covid-19 pandemic intervened.
Its replacement offer was 20 cents cash plus 0.392 of a Centuria stapled security – equating initially to an implied $1 per share. In early July, Centuria lifted the cash component to 22 cents.
A Centuria stapled security comprises an ordinary share in Centuria Capital Ltd that is stapled to a unit in the Centuria Capital Fund. The securities sold on the ASX on Thursday at A$1.865, which translates to an offer price of NZ$1.0181.
Impact of Residential Tenancies Act changes
After this I’m done with writing about last week’s passing of the Residential Tenancies Amendment Bill.
Now that it is enshrined in law, something we would have expected from left-leaning parties such as Labour and the Greens but not those turncoats at NZ First, there’s nothing we can do about it. Investors must move on and make rational decisions based on the new environment.
Tony Alexander says he is neither a lawyer, landlord, accountant, nor property manager, so his views as a macroeconomist might not be what investors want to hear.
Writing in this week’s Tony’s View newsletter, he says that the higher proportion of people renting these days is partly because housing is less affordable in New Zealand than it used to be, but also that people are not as willing to settle down in one location as they were in the past.
“We live in a rapidly changing world and people naturally prize the flexibility to pursue opportunities which renting can deliver compared with home ownership.”
“For these and other reasons … it is expected that the proportion of households renting will remain high over the long-term and may climb higher.”
Alexander says that successive governments have simply been responding to the voices of this growing cohort of renters who are concerned about the standards of properties they inhabit, and the terms under which they secure and rent a property.
At the same time, he says, another push has been in play. “There have been many concerns expressed that investing in housing may confer tax advantages not available for other forms of investment.”
Alexander says that if any advantages do exist, it’s almost entirely down to the availability of finance. This enables investors to use gearing when investing in housing, which is not the case when investing into other assets such as shares.
“Nonetheless, encouraged by concerns about affordability and incorrectly believing these concerns can be alleviated by reducing returns for property investors, numerous changes have been made over the years.
“Unfortunately, the imposition of extra costs on landlords has caused rents to rise more than would otherwise be the case.
“Higher rents have made the renting community more vocal in their demands, and this has resulted in more political response – again against property owners.”
It demonstrates a lack of critical thinking that the government would see their actions leading to a negative outcome for renters in the form of higher rents and think that more of the same might lead to a different outcome.
Alexander says that “discrimination against tenants considered less desirable” is an additional factor that has come into play.
“The decreased ability of landlords to quickly respond to problem tenants has made securing accommodation more difficult for those whom landlords might categorise as belonging to problem groups.”
The perfectly rational response from landlords is to favour ‘good’ tenants. This, however, has led to social problems with more people finding themselves dependent on state accommodation.
“The waiting list for state accommodation has blown out and looks likely to keep growing, despite a growing state house building programme.”
This marginalisation of those at the lower end of the socioeconomic spectrum is something the government has created through their well-intentioned but misguided policies.
As the hand wringers become increasingly concerned about the increasing marginalisation of those people, it will only lead to more rules such as we have just seen introduced into law. This will inevitably cause the problem to get worse, not better.
Property investors tend to view government policies that negatively affect them as driven by a desire to punish them, reduce their returns, or improve housing affordability.
But Alexander says that, “Mainly, the legislative changes reflect government recognition that an increasing proportion of the population will spend a long time in rental accommodation compared with previous generations. Government desire is to try and make living conditions better for this growing group of people.”
“Sometimes simple analysis will make it clear that the policies they introduce will have the opposite effect.”
But Alexander says that one could never accuse “social policy-driven politicians” of understanding what drives the actions of investors, businesspeople, and capitalists generally.
“Therefore, much as lobbying from various groups may focus on the ways in which changes will negatively affect property investors, the ears of the policy-setters in a centre-left government will be closed to them – as we have just seen.
“And, while the current Opposition may promise repeal of recent changes, history tells us something about National when they get into power. Their tendency is not to unwind policies of social equity introduced by Labour.”
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