The newsletter’s a bit later this month as I wanted to see what was happening with global interest rates.
Last week the Reserve Banks in New Zealand, Australia, England and Canada all made announcements. Cash rates are now as follows:
• New Zealand - 7.25% - held for the last two months. The Bank says the economy is slowing but household spending – driven by a still buoyant housing market – has only recently started to wane. Says little chance of a cut this year. Opinion is that any increase is unlikely and any movement would be down.
• Australia - 5.5% - unchanged since March last year. Increased terms of trade, driven by a huge resource based economy, have resulted in business investment having expanded at an average annual rate of 14% over the last three years. Credit growth in the non-productive household sector has cooled considerably since the end of 2003.
• England - 4.5% - unchanged for the last seven months. Bank of England happy with current policy. Economic growth rebounding and inflation sticking close to its 2% target over the next two years.
• Canada – 3.75% - a rise of 0.25%. Overall indications are the Canadian economy is continuing to operate at its full production capacity. The Bank of Canada says some modest further increases may be required to keep aggregate supply and demand in balance – whatever that means - and inflation on target over the medium term.
• Europe – 2.5% - a rise of 0.25% on 2nd of March. The President of the European Central Bank said evidence suggested economic activity is improving and they should see stronger growth rates in the short term with inflation rates likely to remain over 2%. At question time after the announcement he refused to be drawn into any predictions of further rises or cuts.
• Japan – 0.1%. The Bank is expected to end its loose zero interest rate policy. With the end to deflation in site, the Bank’s board - which is meeting this week - is expected to keep interest rates low now, but to signal rises are possible in future.
• United States – 4.5% - a rise of 0.25% in February. Next Federal Reserve meeting is on the 28th of March. New U.S. Fed Chairman Ben Bernanke, has reiterated inflation remains a risk to the economy – meaning U.S. interest rates may need to keep rising. The Fed has now raised interest rates 14 times since June 2004.
Let’s assume the U.S. rates does go up to 4.75% later this month - bearing in mind the market is saying Fed funds will be at 5% by June and there’s a 33% chance of it hitting 5.25% in October. It’s therefore interesting to compare the differences between the rates shown in my November 2005 newsletter with those now.
• New Zealand - up 0.25%
• Australia – same
• England – same
• Canada – up 0.75%
• U.S. – up 0.75%
• Europe – up 0.50%
• Japan – same but change in attitude expected.
With New Zealand still well at the top of the rates, which are unlikely to go higher here, the gap between NZ interest rates and those overseas is narrowing.
This makes New Zealand a less attractive place to park money and – especially with the announcement expected in Japan - maturing Uridashi issues may not be replaced. And there are plenty of them maturing in the next couple of years. This puts further pressure on the NZ dollar - which everyone says is overvalued.
A falling currency puts further pressure on inflation as imports cost more. Especially with oil where I expect we’ll see US$100 per barrel before we see US$30 again. So while a lower currency is better for exporters it does increase imported costs and adds to inflation - which in turn keeps the Official Cash Rate up.
The question now seems to be how far will the New Zealand dollar drop and how fast? A recent article by First NZ Capital’s economist, Jason Wong, suggests any fall will be less than experienced in the past. He says on a Purchasing Power Parity basis the NZ dollar is most over-valued against the Yen (39%) and to a much lesser extent against the US dollar (10%), the Euro (10%) and the Australian dollar (4%). He’s predicting rates at the end of 2006 being US$0.61 and A$0.86. End 2007 predictions are US$0.58 and A$0.84.
The other thing coming out of the rise in world interest rates is cheap money is becoming harder to find.
To me this means there may be a window of opportunity to fix rates now, which are largely based on U.S. rates. Fixed residential rates have been falling since the beginning of the year. Now two year rates look the best but if you’re planning to hold the house for the medium to long term, I’d be fixing for 5 years or more. These rates are now below their long term average.
Talking about fixed rates reminds me I should tell you there is now a greater variety of commercial lenders and funding packages available in the market. Examples include:
• A bank offering an interest rate swap alternative for fixed rate loans over $2 million. Interest rate swaps allow borrowers to obtain lower fixed rate finance with the ability to improve their interest rate hedge position as market interest rates move. The sophisticated swap market has been available only to larger “professional” borrowers in the past.
• Financiers willing to provide a combination of equity and debt for developments.
• Joint ventures where private investors provide equity or quasi-equity for a share in development profits.
• A bank offering 75% loans and extended interest only periods for qualifying commercial properties.
• A bank offering up to 100% loans for established businesses purchasing the building they occupy.
• A non-bank lender offering 80% loans to owner occupiers at close to bank rates.
• Interest only loans from non-bank lenders at bank rates.
• Non-bank development loans at bank rates.
• Non-bank rural and farm loans. Strong interest in these now as farmers look to refinance and as the 1st of June approaches – the date farm sales settle.
Space prohibits me from listing all the finance options or going into any detail about them here, so for more information give me a call on 09 303 3700.
And talking about commercial finance, unlike the housing boom which economists agree has now peaked, the commercial property market is still on a roll.
The Property Council reports the returns on investment in commercial property are the highest in the 17 years since the Council’s Investment Performance Index was started in 1989. Investors received an average return of 18.66% in 2005, up from 14.46% in 2004.
It’s significant to note that the income returns remained steady at 9.28% and it was the capital growth component that showed the strong increase. These ranged from 5.94% for bulk retail to 14.14% for industrial.
It’s not surprising that the two industrial sectors were the standout performers – the total return on industrial was 24.6% up from 13.75% in 2004. In my view the two major factors that have contributed to this - other than a strong economy driving rental growth - are:
• The demand from offshore investors – especially Australia where the compulsory superannuation legislation continues to pour investment money into the economy.
• Shortage of suitably zoned land. There are two reasons for this. First, resource consent delays. For example, Transit New Zealand seems to be blocking, or taking ages to approve, developments on the basis of congested roads. And second, land banking by large players like Macquarie Goodman.
Shortages are of course worst in the main cities. A recent report from DTZ research shows land values in Auckland’s East Tamaki have risen 160% since 2002, in Manukau 125%, in Wiri 130%, in Albany 100% and in Mt Wellington 90%.
Yields on commercial and industrial properties are still low even though interest rates have risen. Sales of fully tenanted long leased commercial properties based on yields in the 6% - 7% range are more common than in the 8% - 9% range that one would expect on current interest rates.
So is commercial property here overvalued? If New Zealand interest rates stay where they are maybe it is.
In the end it’s supply and demand that dictates price. So if there are any questions about a property you’re considering buying, just remember the same criteria as residential – location.
It’s the location which determines the tenant, which determines the lease, which determines the price.
Cheers
JP
John Paine
Global Pacific Corporation Limited
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
Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by this statement to exclude liability for any such opinion and statement.
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