Both commercial and residential property investors are likely to be stuck in a period of considerable uncertainty once the Covid-19 lockdown ends and for some this will almost certainly end badly.
The lockdown itself would have been bad enough for landlords, with many tenants seeing their revenue streams dry up completely or at least reduce considerably over that period, but worse may be to come, with a prolonged recession likely to inflict even greater damage.
Although the commercial and residential property markets have different characteristics, they do have something in common.
How well their investors survive the looming recession will depend on two things: How much debt they are carrying and the financial strength of their tenants.
Initially commercial property investors are likely to be hardest hit, simply because many tenants will no longer be in business once the lockdown is lifted.
Although the Government is pumping quadzillions of dollars into the economy to keep it afloat it can't save everyone and there will inevitably be casualties.
At this stage we just don't know how many but the longer a recession lasts, the more vacant spaces we are likely to see.
Initially the smaller owner-operated businesses are likely to be hardest hit because so many of them survive on their day-to-day cash flows and have no financial reserves to fall back on, but the ripples will spread all the way up the food chain.
Even large, financially strong companies will be affected and buzzwords around the water cooler will be cost-cutting, restructuring, downsizing and redundancies.
Expansion plans may go on hold, companies that may have been considering a move to bigger or better premises may decide to sit tight, others will seek out smaller or cheaper spaces.
Vacancy rates will increase and periods of vacancy are likely to be extended.
Finding new tenants to replace those that leave won't be easy.
All of this puts downward pressure on rents and that in turn drags down capital values.
Landlords with low levels of debt who are fortunate to have financially strong tennants that can continue honouring their leases may actually see their cash flows improve as their rental income stream continues its course while their interest costs decline.
But they will probably be a minority.
Those who have leveraged up to the max and suffer significant levels of vacancy probably won't survive, even as mortgage interest rates wallow around new lows.
The majority will probably be somewhere in between.
They'll survive but they'll be a lot leaner after a prolonged diet of meagre gruel.
For residential property investors the situation is different.
The immediate impacts of the lockdown and associated measures such as border closures will be an exodus of properties from the holiday accommodation market to the mainstream rental market, while many residential tenants will have suffered a loss of income.
For some tenants the loss of income could be substantial and ongoing.
However while commercial tenants can shut up shop and simply disappear from the market, residential tenants continue to need somewhere to live.
So demand for accommodation will continue at current levels, at least in the short term, but there will be some downward pressure on rents, which should at least be partially offset by recent declines in mortgage interest rates.
But if recession drags on and unemployment keeps rising, immigration is likely to drop away and that could reduce demand for housing and put further downward pressure on rents, while capital values could also fall quite sharply.
With microscopically low interest rates now seemingly locked in for the foreseeable future, investors with low to moderate levels of debt should be reasonably well placed to weather the storm.
But those who have borrowed to the max could find themselves in trouble and the vultures are already circling.
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373 Comments
Ha.
Having said the above, I do think NZ will be better off than most. But that's not saying much!
Our very high levels of private debt will be our Achilles heel, along with our reliance on tourism.
Isn't it sad that the property party wasn't seriously nipped in the bud years ago? Then our private debt could have been much lower.
Oh well, a few of us warned but fell on deaf ears....
Fritz, if you don’t like it, then why are you still in NZ?
Go overseas and see how well off you will be!
Why don’t you read my comment of 4.20!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Where I said we are better off than most.
I like living in my country.
Does that mean I can’t be critical of certain things here?
Or do you think we should all be blind patriots?
Fritz, you would be a lot of fun at a party I am sure.
True , our leaky, windy wooden shacks are of shockingly poor quality , and many are conned into paying stupid prices for them .
Its lunacy
Malarkey, you say that NZ houses are rubbish quality and grotesquely overpriced???
What price would you consider to be fair for a 3 bedroom 100m2 brick home on a 600m2 section?
Are you saying that all houses in NZ are rubbish quality throughout NZ and you reckon that the building compliance checks are not thorough enough???
What is your expertise that you have that means we can believe what you say or are you just another envious non home owner?
Appreciate your answers
Time to start selling NZ residency - for very large sums to boost the governments coffers.
Special category - Can buy an existing property, not allowed to vote or contribute to political processes and a $5 million entry fee. Rich folk will flock here in their thousands.
Ahhhhhh no. But let's put a 5% land tax on all foreign owners.
Straight out of the Nats playbook that on -is that you JK?
I remember studying the great depression ,investors and landlords said renters still have to live somewhere ,downsize etc etc ;however, a lot of people started bunking up with families,even when they had a job in fear things might get worst , leaving an excess of rental properties that remained vacant for sometime.
I think we need to let the dust settle a little ;but,my gut tells me its not going to be pretty out there after the lock down,ive just been told by my employer he can only guarantee work for another 12 weeks and then they will re-evaluate the situation-Im not alone and compared to recent redundancies feel im pretty lucky right now to have at least 12 weeks..
A lot can change in 3 mths as we have seen great that your employer has been up front and honest gives you time to plan and look at options hoping they aren't needed . I lost my job in the 87 crash it was life changing but came out of it better off but had to change career path completely to do it amazing what you can do when you have to
A lot can change in 3 mths as we have seen great that your employer has been up front and honest gives you time to plan and look at options hoping they aren't needed . I lost my job in the 87 crash it was life changing but came out of it better off but had to change career path completely to do it amazing what you can do when you have to
Just looked at new property listings on Trademe. Some deluded agents are still trying to pull the 'price by negotiation' scam. Sorry to tell you agents but if you want to sell now, you need to list a price...... and that price has to be at least 30% lower than it would have been a month ago.
And so it begins : https://www.trademe.co.nz/property/residential-property-for-sale/auctio…
Just type "reduced" into the search on Trademe and you will see the panic has well and truly begun.
So you're prepared to sell the houses you bought in NZ as a Foreign Buyer at min 30% discount?
I only need one home to live in, so that's what I have got. I have made capital gains on this home but all other prices have gone up too so it means nothing to me. I hope all house prices drop so all New Zealanders get a shot at owning a home. Its only fair.
So you're a foreign buyer, who has bought a house in NZ but you rent where you live overseas?
Renting is not for me. I have been lucky enough to be able to buy. I feel sorry for people who have to pay rent just to make somebody who was born at an earlier time richer. I feel empathy for other people and understand that not everyone has this trait. But it is what it is.... or maybe was?
Nothing to do with luck at all.
There are heaps of people who are 60 or 70 years old, who never owned a home?
It has always been the way and always will be.
Housing in NZ is affordable in most parts of NZ.
Would I have bought a home In Auckland, no I wouldn’t because it is not that desireable to live nowadays unfortunately.
Could be done if you'd bought with A$ 75 cents = NZ$1 a few years back. Sell now and get back A$ 97 cents back for your NZ$1 and that covers any asset loss - 30% in currency gains. Being a foreign buyer and all...
https://tinyurl.com/td2c88m
and....
Not too far away (25% currency gain) against the Chinese Yuan (3.40 to 4.30) over just a few years longer. Now there's room for thought! The China buyer can escape with just a flesh wound if they timed it well....
Bare land. Possibly a landbanker speculation on land prices rising, where the purchase was financed by debt ...
Highly leveraged property owners will try to raise cash where they can. Especially on items which are not essential - idle land, holiday homes, boats, high end cars, jet skis & other toys ...
NZ public & current govt, would love to watch this - during the lock-down period:
https://www.scoop.co.nz/stories/HL1507/S00101/the-fire-economy-new-zeal…
The world is in unison. Unilateral money printing at infinite levels and asset owners saved by extremely low mortgage rates and deferrals. That is what is happening right now.
Trump: the dollar is “our money, our currency”
“The beautiful thing about our country is $6.2 trillion — because it is 2.2 plus 4 — it’s $6.2 trillion, and we can handle that easily because of who we are, what we are,” he said.
“It’s our money; we are the ones, it’s our currency.”
While Trump did not provide any further explanation of his train of thought, he appeared to endorse the Fed providing the astronomical sum of liquidity for the U.S. market. In turn, the dollar supply would be heavily expanded.
But where are those dollars going?
Not into average people's pockets to buy stuff with. They are going into financial market support mechanisms.
In reality, there will be less consumer dollars to spend than there have been, and this virus mess just makes things worse.
In essence, the more dollars that are 'printed' the worse things are (that's what the process is telling us all in case we haven't noticed!), the lower asset prices will go.
They are flooding the system with liquidity. You might call it QE infinity. Will it be successful, who knows. But banking on asset prices falling massively when that is occurring is questionable. I am expecting to renew my mortgage in the mid twos soon. I can currently get a 1 year discounted rate at 2.84%. Consider these very low rates and the ability to defer mortgage payments. I suggest when the Corona storm has been and gone the markets will react to this tsunami of cash.
Ben Bernanke says the Fed shouldn’t rule out using negative interest rates. Good luck with your savings in cash!
The country changed a long time ago. The rock star economy couldn't give monkies about those that it ran over last time round, didn't even look in the rear vision mirror. I love the levels of optimism, and relate to the stories of realism. Over 20 years, I had a shop, on lease.
10 years, old school landlord, really helped my business, when times were hard, really understanding, etc. Following 10 years, (old school retired and sold to new owners) were diabolical. Rent increase, invented costs, 14% penalty on any late payment.
Flash car, non negotiable attitude, a complete and utter t***er. I sure hope he loses the shirt off his back, and joins the homeless. Greed that feeds generally has very little understanding. I'm fairly sure each will get what they deserve. The economy just keeps shrinking, like a game of monopoly where only those still on the board have voice, never noting the many that are no longer in the game.
The t***er landlord did me a favour. Got out, dumped the mortgage etc. Freehold, no debt. Not lavish, yet a great way to sleep at night.
This may echo your feelings! "They deserve to get wiped out!"
https://www.youtube.com/watch?v=qAt7Rg1u2l8
If you wipe out the borrower, then you wipe out the lender and the investor or saver. Letting everything crash to the ground is one way of doing it. Adolf Hitler found it a great way to unite his people and we know how that ended. All I will say is, be careful what you wish for. I actually admire risk takers. Those people make the wheels spin faster, make things happen (Elon Musk!). Doom and gloom merchants should build their Covid bunkers, grab heaps of toilet paper and disappear.
Yes I'm a big fan of Elon Musk as well - but as long as you aren't putting landlords in the same category as him in terms of risk takers? I'm also a doom gloom merchant when it comes to our current outlook - but that is because we've acted like idiots on the way up. I'm not a negative person, just dealing with the reality of the situation we find ourselves in because of poor management.
I have been in the workforce since 1984. I have moved cities several times and had to rent houses in those cities. I have never had a problem with rental investors. If fact I have rented some great houses and found the types of people involved to be nothing other than hard working and committed types. It is my opinion that most people don't understand fiat currencies, government deficit spending and monetary inflation. If you are looking for a reason housing has been so good for those who have bothered to go down that path, then blame government policy / lose spending. In this current time you need to realise that fiat currencies are nothing. They have no intrinsic value, they are the same as Bitcoin. I see all risk takers as the same. Perhaps some are greedy and undeserving, but they have a positive economic impact. As much as people hate Donald Trump, his property endeavors will have created plenty of economic activity. I see no difference between a Tesla or a house available for rent.
Like I said, each will get what they deserve. Great landlords, residential and commercial, will work through the situation. It's going to get hard, and those that remember to have a human approach will do much better than those for whom it's all about figures and status (and ego).
There is that 1% who are not risk takers, they are something else altogether, and in large part, they already got out, so in that, they will not be getting what they deserve, not yet anyway. Fiat, I agree, is worthless, yet the majority are a long way from seeing, or understanding that. The last thing I would like to see is the common folk beating each other up. The CEO's of large organisations, those that have been buying back their own shares to inflate prices, and their own back pockets, the people the guy in the clip was referring to, they're the ones that should be left to go under.
Problem is the world does not dish out these things as you would hope. A hard working decent investor will be smoked just as much as the greedy scum you talk about . The worst types often swoop in and end up even better off. If there is a massive asset price reset, then the process just starts all over again.
I see no difference between a Tesla or a house available for rent.
This might be one of the most ridiculous things i've read in these comments.
Telsa has created and refined a range of new technologies and revolutionizing an entire industry, creating a new product that improves peoples lives. If we had property investors who are revolutionised how we build or design houses I might agree with you. But we don't. We just have people buying existing properties to extract wealth from the productive economy to enrich themselves.
You are right, it is ridiculous. We need rental houses, we don't need fancy cars.
Tesla spends $1 million annually on Washington lobbyists. Its cars are financed by over $280 million in federal tax incentives, including a $7,500 federal tax break and millions more in state rebates and development fees. SpaceX has also received over $5 billion in government support. Tesla has about $13 billion in debt on the books.
I am trying to think how a Telsa would improve my life. Might make me look cool, but offers nothing new over a ICE vehicle. How many new power stations will be needed when every car in the world is plugged into the grid at night. I like new tech, but some of it is not necessary. I have in my life needed to rent houses. There won't be a point in my life where I will need a show pony Tesla. The batteries in those vehicles are an environmental disaster waiting to happen. I suppose you are a big Apple fan. Great tech, but look at all the moronic kids glued to them with text neck. Look at decline in education due to phone addiction. The gains made by holding property are mainly a function of the constant decline of the value of money.
Dumb presenter. Clever interviewee.
Great piece, thanks for the link.
Nice summary.
Yes as a generalization landlords back in the day seemed much more human.
NZ has turned into a really nasty, self interested place in many respects.
The rot started in the 1980s, but I think has really got much worse since the early 2000s.
Fritz, what was it that made you become so bitter about things?
Landlords are no more nasty as you put it nowadays than what they were 40 years ago!
More professional I would say and they need to be.
More professional? Ha, pull the other one.
I have had a couple of shockers in the past 5 years.
There are shockers in everything occupation.
We have experienced very poor property managers when we have contacted them for references etc. but that is because they don’t have a financial interest in the properties they manage.
More professional means running their portfolios as a business rather than just having a property rented out for the sheer hell of it.
You can be bitter and twisted towards property investors if you like a Fritz, however it won’t achieve a damn thing, and you would be better off trying to improve your own lot rather than being jealous of them.
.
Here is a great example landlords becoming more nasty:
If tenants do not pay, they will have a debt to be paid back and will never own a house ever due to their debt going on record, and also they will struggle getting another rental!!!!!!
When we are about to see record levels of unemployment and disruption to income (due to no fault of their own). And your attitude is "pay me or i'll blacklist you from getting a house or rental property in the future". Sounds pretty nasty to me.
Vendor wants sold? $599k?
https://www.trademe.co.nz/property/residential-property-for-sale/auctio…
Will be lucky to get 500k
Interesting. Headline of ad seems like the vendor is an urgent seller. They want it sold at $599k.
Purchased by current owner for $220,000 in November 2018.
Listed for sale on Trademe.co.nz since February 2020.
1) 2018 RV is $250,000.
2) Properties in the area are selling at 0% difference to RV (i.e 1.0x RV).
https://www.qv.co.nz/property/180a-vale-street-otumoetai-tauranga-3110/…
So the vendor is asking 2.39x RV...
Here's a more accurate headline for the advertisement by the vendor - "House for sale at $599k. Sucker wanted." ...
I strongly suspect that purchase price was for the land only.
The build cost for that house is probably about 200k, so they might break even if they sell for 475k
Thanks Fritz for that insight.
I just undertook a 3 min analysis on it out of curiosity.
To breakeven, they might have to sell at around $500,000 price to allow for selling commissions and marketing costs. (Might be some financing costs that I've also omitted, not sure if they are in your construction estimate)
It's probably these sorts of vendors that might have a tad more difficulty than your listing. Only a couple of hundred metres away .
https://www.trademe.co.nz/Browse/Listing.aspx?id=2492432193
Optimistic price when listed in January. What do we think today's first offer should be? $1.45M given Phil Rudd's place - 4 times the size (?) and actually on the waterfront went for about $4m some months back (to the new Tauranga mayor?)
How old is it? Looks a bit like a leaker but I suspect it’s a fairly new build
Thx. So back to just 2015 'value' looks about right then ;)
Sounds like leaky era. Wouldn’t touch with a barge pole
"Wouldn’t touch with a barge pole"
There is always an acceptable price for any asset. There is some price at which the property would be a bargain. Would you buy it, for say $10,000?
Sure. Close to the value of the land.
BW,
If that offer is rejected by the vendor, & they ask you for your next offer, you lower your original offer by 10%? ..
You're one savvy buyer. Were you ever a trader in a bank?
Yes, and yes.
Thought so. I never want to be on the other side of you in a trade. Just out of interest, what instruments did you trade?
In this scene, you are the equivalent of the guy Laurence of Merrill ...
https://www.youtube.com/watch?v=1ycYGuI8SkU&t=78s
Nice to chat. "Once a dealer, always a dealer" Cheers.
It's not even for the contents of the full section, its just that ugly box at the back. Not even waterfront for that price. Tauranga is in for a BIG shock.
The property looks new. The last sale price was probably the section only. $600,000 at 3% is about $350 per week in debt servicing.
What is your point?
Certainly appears to be a very basic box not worth the money they have on it, for over $599k.
This has always been my point, buy good quality property that will give you positive returns and under true market value.
Anyone can buy an overpriced property and rent it out and call their selves an investor.
Those ones may well feel some financial pressure, but professional experience investors will be just fine.
You mean like Terry Serepisos? Maybe Howard Patterson? No, hang on - he's dead; checked out before his Pegasus Bay turned its toes up. Philip Carter? Has he rebuilt his hotel on the Avon yet? And as for"The Tannery"? Well there's a bit of professional investing for you!
Then, of course, we have the Collection of professional investors in Queenstown! They are in for a sobering time ( literally!)
Property prices are already 15% lower. It's just that there's no functioning market at the moment to prove it.
This is good watch
https://youtu.be/zeF2rkyxDIo
The last time I picked kiwifruit was about 2004, contract rate earned average $16 per hour (4 bins per hour at $4 per bin). Internet tells me minimum wage then was $9.
Which part that difficult to understand? private & commercial Landlords, Banks property loan are all critical Essential Services - so much so, JA already gave assurances on her speech? - just because loosing their job due to Covid19, loose/reduction of income due to Covid-19, she will not allow people to sell their houses due to force majeur. Not/Never under her watch she said, the same when she said about CullenCGT. Regardless that those peoples opt mortgage to the tilt/neck etc - Reckless Bank loan due to cheap/easy money coming from Overseas etc - Govt. RBNZ collectively stated that the 'whole Nation' will carry the burden'. Savers.. you 'looser' again here. NZ need to keep afloat the property binge ponzi scheme.... at Any Cost, you can be sure about that.
Nope. All the speculords keep telling us that they run a business. Ok then, if your business is inefficient (poor debt to income ratios), and a major down turn happens then nature takes it course. In the speculord example, tenant leaves, go broke or moves elsewhere, realizes business work from elsewhere etc, and there are no new tenants, then the speculord has a very big problem. Their bank now calls the shots, the first of which will be you need to get some equity -fast. Sell something on the new (lower) market, sell family home, borrow from second tier (oh yeah most of them are bankrupt already in 2009), borrow from family etc. Options end in a mortgagee situation, and banks will look after them selves first. The first to trigger mortgagee position will get the best return. Once everyone starts doing it then there is less to be returned. A very large % of tenants will not shed any tears.
Be in no doubt this is a once in a generation chance to change the death grip (mort gage) of the financial over leveraging class. Cut your costs, work remote somewhere cheaper, move home and save save save preferably not in an Aussie bank.
I've said something similar in the comments section, so forgive me if you've already read this. I'll abbreviate my rather long original post. Currently, policy is being set by statists with little economic skin in the game. That is a concern for those of us in the real world. Covid kills the elderly and infirm at far higher rate than under 70s, a rate which improves dramatically as you move down the age scale. No argument there. So, help those at risk isolate in comfort, let everyone else get back to work, with masks, gloves, hand sanitiser and daily temperature checks. Get the vital international education sector going again by requiring point of entry health checks, then subsidised self isolation in one of our many empty hotels. Make risk management rather than risk elimination the criteria for all decisions. It would seem obvious that we can manage the health implications, ie hospital admissions, if we protect those most vulnerable and let the rest get back to some semblance of normality. Tax response? Higher personal rates, super tax for over 65s getting full time salaries and super, raise the super age to 70 over the next decade, subsidise redundancy packages for over 60s to free ups jobs, basically, think outside the square.
Pietro
Yes, and all the young can spread the virus around like confetti and we can have another Italy, Spain and New York all combined in one.
Whether you like it or not the two choices are either:
- lockdown, economic pain or
- no lockdown, high number of deaths, lockdown, economic pain.
Italy, Spain, UK, France, New York . . . All examples of the second choice and the one you propose.
No other country had any experience of what you suggest. Those that have tried end up with the second option.
A no brainer.
Rubbish, printer8, there are not just two choices. All countries will come out of lockdown soon. Look at Taiwan. Pietro has it right, it needs to be managed and clearly can be. Social distancing and masks can contain this virus.
The fact that no clusters are associated with people on the same flight proves that it is not as contagious as feared.
I get it, you're old, and don't want your life inconvenienced in any way, everyone must suffer together.
zachary
If you cant put up a good argument don't resort to aspersions.
NZ public & current govt, would love to watch this - during the lock-down period: (bluey team anyone?xixi)
https://www.scoop.co.nz/stories/HL1507/S00101/the-fire-economy-new-zeal…
https://www.youtube.com/watch?v=3bXWGxhd7ic - and we have a free trade agreement with them. Good for us
I dont have a good feeling about things ending well for many
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