09 June 2010 Printer Friendly Version

 

 

12 months of recovery - but where's the money?

 

  

Let's enjoy it while we can
Won't you help me sing my song
From the dark end of the street
To the bright side of the road

 

Van Morrison - Bright side of the road.

 

 As we approach winter and midpoint of the calendar year, it’s interesting to reflect on how New Zealand was affected by – and is recovering from – the so called worst global recession in 80 years.

 

 I mentioned the first signs of economic recovery a year ago in my May, June and July GLOBALVIEWs. Copies in archives here

 

 When my last newsletter on this subject, Global recovery, bubbles appearing, food’s the future, came out last January I said New Zealand was looking pretty good – especially compared with other countries. To see that newsletter click here

  

Since then a number of factors point towards a continuing economic recovery here - including the following.

 

 Commodity prices

 

 I guess the first signs of recovery appeared about a year ago when commodity prices – and dairy prices in particular – started an export led recovery.

 

 Last month the ANZ commodity price index rose 2.5% to a record 283.6 (in NZ dollar terms 2.9% to 216.5, also a record). Price increases were for 8 of the 13 commodities measured and included dairy prices (up 4% - nearly two thirds from a year earlier), Kiwifruit up 11%, skins up 12%, wood pulp up 6% (from April’s 10 year high), wool up 5%, lamb up 3%, Venison up 2%, and logs up 1%. To see the report click here

  

And, partly driven by this, Statistics New Zealand reports in the year to April 2010 we hit a trade surplus of $161 million - our first annual trade surplus since 2002. To see the stats click here 

  

Fonterra now predicts a payout of $8.00 per kilogram if prices and the exchange rate stayed at today’s levels. Strong dairy prices quickly filter down through the whole economy so that’s a good sign.

 

 Business confidence

 

 The latest National Bank Business Outlook showed confidence levels held steady in May with a net 48% of companies surveyed expecting business conditions to improve in the next 12 months.

 

 A net 16% of businesses say they intend to hire staff – the highest level since April 2002 – and 14% say they intend to increase investment. Only 11% expected the jobless rate to rise in the next year giving the potential for a 4% growth in the labour market.

 

 Overall a net 45% of respondents are picking a better time ahead for their own businesses. To read the National Bank Outlook click here

 

Businesses have faced a difficult period over the last couple of years as consumers retrenched and repaid debt. Lower revenues have been compounded by a critical shortage of finance – especially for SMEs (small to medium sized businesses). But see Where’s the money? below.

 

 Housing

 

 I’ve always maintained the housing market is a leader of the New Zealand economy. A year ago in the June 09 GLOBAL VIEW I said “A major driver of New Zealanders’ investment sentiment is the state of the residential property market, and this is now starting to show signs of increased activity.” Well all the signs are this is continuing.

 

Rodney Dickens’ latest Ravings gives an excellent view of housing market prospects. He tells you why the Auckland housing market cycle is closely correlated to the national cycle and why Auckland house prices are currently outperforming the national market while residential building is significantly underperforming.

 

Other parts of the Ravings include how economic cycles impact on the housing market, where the economy is heading, and is it a good time to invest in existing or new housing? It’s great read - to see it click here

 

Other good news about the housing market includes: 

• Home building and renovation consents rose to a two year high in April to $480 million - a 35% jump on April 2009.
• Auckland house sales and prices rose in May with Barfoot & Thompson recording an 18% increase in sales from April and a small increase in the average sale price to $542,806.  

Tax changes announced in the budget will do little to discourage housing as most people’s major asset or investment.

 

In Australia there are concerns a housing market bubble is again growing. The 2008 downturn in house prices there was merely a hiccup and they are now growing at an annual rate of 12% - 15% in major cities. In Sydney the average house price is higher than London and New York. For some world house price comparisons see the Sunday Telegraph article here 

  

Affordable housing campaigner and co-author of Demographia, Hugh Paveletich, suggests Australia could be repeating the California experience where the global financial crisis was triggered. To see the article click here  

But the Australian government seems less concerned. At the Financial Review Residential Property Conference recently held in Sydney, Luci Ellis the head of Financial Stability Department, delivered a detailed speech about recent developments in the housing market there. To read this click here

She summed up by saying “To conclude, housing prices have been under upward pressure in Australia. The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices. Some of that pick-up in construction does seem to be happening.

 

“Every cycle starts with something real, something fundamental. Recent data suggest that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one. It will therefore be important for lenders to remain prudent in their standards. It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts.”

 

Sounds pretty much like the situation here. Natural economic forces - including the tighter availability of credit and increasing interest rates - mean the excesses we saw from 2003 to 2007 are unlikely to occur now.

 

The quarterly Property Report insert in yesterday’s New Zealand Herald gives good comment on the Auckland and Hamilton housing markets and prices for the North Island.

 

Commercial property

 

The Property Council IPD Commercial Property index recorded a 2.4% total return for the year to March 2010 - the first positive return in 18 months. This was made up by a positive 8.1% income return and a negative 5.3% capital decline. Annualised total sector returns were positive for industrial and retail property but negative for office.

 

The report says “The favourable return performance for the industrial and retail sectors was driven by an improved capital return, which although still negative was more than offset by the income return. The improvement in capital returns reflects a claw back in asset write downs and levelling out of cap rates. The negative return for office reflects a combination of factors: higher vacancies due to weak demand, lower expectations of future rental growth and upward movement in yields.”

 

Commenting on New Zealand’s comparison with global property markets, they say “Notably, the property markets of Australia, New Zealand, Canada and Japan have experienced a relatively mild downturn in comparison to other major property markets, such as the UK and US.”

 

“The relative outperformance of the New Zealand and Australian property markets to those of the UK and US highlights the strength of their banking sectors and resilient state of their labour markets.”

 

To read the report click here

Well I’m not sure the commercial property market is about to enjoy the large capital gains it did prior to the recession.  Reasons include: 

• Interest rates are still artificially low as governments worldwide attempt to stimulate their economies. This cannot last forever. Australia first raised it cash rate in October last year and has done so each month until now. Canada has just raised its rate and our economists are picking a rise here when the RBNZ announces the cash rate on Thursday. As interest rates rise so will capitalisation rates for property, forcing values down.
• Vacancies abound and tenants are holding the upper hand. Leases expiring are not being renewed or if they are on very favourable terms for the lessee.
• Large businesses moving into new premises planned years ago are leaving vacant buildings that will be hard to fill.  

However the figures given above indicate we’re starting to see the hint of a change in attitude towards property as an investment. Capital gains are not guaranteed in the short term. In today’s low interest environment it’s all about returns and the shortage of investment alternatives. So even if cap rates rise, and you’re in for the long term, buying property at a 10% yield is a miles better return than you’ll get at the bank.

Foreign capital

New Zealand has always been short of capital but a new project to attract foreign venture capital has been announced by Commence Minister, Simon Power.

 

Investment New Zealand, part of New Zealand Trade and Enterprise, is working with the Ministry of Economic Development, the New Zealand Venture Investment Fund, and the New Zealand Private Equity and Venture Capital Association in the effort. 

  

In response to a Markets Development Task Force recommendation the project “is working with an international investment bank on options for attracting offshore VC funding”.

 

 Well I’ve never been much of a fan for government initiatives in this regard but this looks like a step in the right direction – especially if commercial interests are involved. Let’s wait and see what the update promised by the end of this month shows. 

  

But where’s money?

 

 A repeating theme in the GLOBAL VIEWs mentioned above was the scarcity of credit with finance companies gone, or not lending, and banks retrenching.

  

Finance for SMEs is particularly difficult with a previous major source - finance companies - having disappeared. But there are ways of obtaining loans - for working capital especially - and I’ve been able to obtain these for clients albeit with tighter conditions than before.

  

So if you’re looking for business finance give me a call and we can discuss the options available. 

 

Commenting on loans for property in the November 2009 GLOBAL VIEW I said “The emergence of new lenders is starting appear. Some of these non-bank lenders are only interested in short term bridging loans and are expensive, but there are others that charge near bank rates for residential and commercial property provided good debt servicing can be shown."

“The cost of money reflects the wide risk profile between low ratio loans with proven debt servicing, and loans given at a time of uncertainty about asset values and the ability to realise them in the event of default.”

 

Nothing much has changed since then but now we are seeing more private lenders coming into the market. These include investors disillusioned with the current property market and wealthy individuals with access to cheap bank finance. The characteristics of these lenders include quick decision making (no credit committee) and loans tailored to your particular circumstances.

  

I’ve got good access to these - including loans in the $2 to $5 million bracket - so if you’re interested give me a call.

 

 

Cheers

 

 

 

JP

John Paine
Global Pacific Corporation Limited
112 Gladstone Road, Parnell,
P O Box 3229, Auckland, New Zealand
Phone +64 9 303 3700, Fax +64 9 303 3031
Mobile +64 21 902 004
Email john.paine@globalpacific.co.nz
Web site www.globalpacific.co.nz

Global View: is an email newsletter reporting on the New Zealand Economy with a bias towards how it affects the property and business finance markets.  It is a regular commentary delivered to you by email every month.

Disclaimer: Please note that all opinions and statements expressed in this email are indicative of our opinion only.  Both the author and Global Pacific Corporation Limited issue no invitation to rely on the information contained in this email and intend by this statement to exclude liability for any such opinion and statement.

Privacy Policy: We will never rent, share, give, or sell your name or contact information to anyone. Your complete confidentiality is guaranteed. Should you wish to receive no further GLOBAL VIEW newsletters from me please click here Unsubscribe me from this mailing list