16 February 2011

 

 

"It is important to learn from history - not dwell on it" - JK

 

Happy New Year and I hope you had a great Christmas break, as it feels like most people took all of January off and enjoyed the weather. 

 

There seems to be a much more positive feeling out in the business community, with most people of the view that the economic conditions are improving and 2011 will be better than 2010, which won’t be hard!

The Positive Aspects Are:

• The prospect that interest rates will remain low. 
• It is election year.
• The Rugby World Cup.
• The strength of the commodity prices being obtained on world markets, despite the high value of the $NZ  dollar against the $US and the €.
• The lack of genuine inflationary pressure, meaning that interest rates are not looking likely to rise until much later in the year.

 

 

However there are still a number of worrying aspects in the economy:

• The weak economy undermining job growth.
• The continuing loss of skilled and semi-skilled labour, particularly to Australia.
• The continued tight credit conditions and their effect on all parts of the New Zealand economy.
• The current state and outlook of the country’s construction industry.
• The diminishing equity in rural land 

- to name a few.


We are starting to see real pressure being put on residential accommodation in the main centres, which has arisen from a severe shortage of new residential construction over the past 24 months .This shortage of new housing stock is now starting to push rental prices up as large numbers of tenants chase the same units/houses, this particularly being felt in Auckland, Wellington and the situation in Christchurch has been further exacerbated by the earthquakes.

 

We believe this shortage will worsen as the lead time to get completed apartment complexes or residential subdivisions to a tenantable stage is considerable. It is interesting how the various economists and in turn the government are looking to push investment away from residential property, but haven’t come up with an answer as to who will then build and own the property required to house a growing population.  It is now becoming more prevalent for larger numbers of the younger population not now aspiring to own a property as a main goal.

 

The effects of the very low yields being obtainable from Residential investment have contributed to this shortage, so the first thing to move will be rentals, which we are now seeing.

 

The state of the construction industry was shown when December 2010 saw the lowest number of building consents issued since 1965 and the Councils and the Government are preferring not to be letting any further local body infrastructure projects as they don’t want a lot of construction underway during the Rugby World Cup, hence the outlook for the rest of the year is not particularly positive.

Discussions with commercial real estate agents imply that the leasing and investments markets have started the New Year on a strong note, with strong levels of enquiry on both fronts.  An active leasing market is a precursor to an active sales market.

  

We are currently seeing the result of a tightened credit policy driving the value of dairy farms down. We have seen the value of dairy farms drop approximately 20% - 30% over the past year despite record payouts to farmers expected for the current season. This lack of buyers is a result of the tighter credit polices of the rural lenders, and their focus on debt reduction.

 

So how is the year going to shape up from a financing point of view?

 

The main trading banks are all seeing their loan books reducing with our perception being that the only bank chasing new business relationships is the BNZ .The larger remaining non-bank lenders, being nominee, Trustee lenders and the finance companies are all able to pick and choose the deals they fund, and charge increased margins and fees, as their competition in this market is minimal.

 

This will change however, as we are seeing new lenders entering the market, and competition for good business will push pricing down.

 

There are a large number of lenders chasing funding proposals in the up to $2.0m range, so that means it can be easier to fund a number of smaller deals than larger proposals at the moment. That being said, there is funding available for larger proposals also depending on the deal, term required etc.

 

The scope of Global Pacific’s involvement in getting transactions successfully concluded  has grown with the across-the-board tightening of credit exposures ,and examples of some of the deals we concluded for clients late last year are:

 

• Introduced a high net worth individual to provide an underwrite to enable a sub-division to proceed.
  
• Finance arranged of $2.3million for a Retail / Office complex in Auckland.
  Interest rate of 9.5%, Purpose was to raise capital for improvements to another property in the owner’s portfolio.
  
• Arranged $850,000 to finance specialized industrial plant and equipment for a South Island operator.
  
• Refinance of a dry stock farm first mortgage away from a trading bank, $1.2million
  
• $2.8million bank first mortgage arranged for an industrial design and build project with high LVR where there were no pre sales but a strong tenant covenant.
  
• Arranged $1.35million for the purchase and refurbishment of a retail/office building in a provincial town. With the equity created by leasing commitment, the project was 100% funded at 12% interest.
  
• First and second mortgage raised to settle a bare land site in North Auckland for development, included a development facility, controlled by a quantity surveyor for draw downs , 8 month term included  capitalized interest & fees.

 

If you or any of your clients require assistance with funding, please do not hesitate to give us a call.  Our fees are success based and getting us involved in the early stages of a project or transaction so often means a better end result.

 

The Team at Global Pacific

Global Pacific Corporation Limited
P O Box 3229,

Shortland Street,

Auckland, New Zealand