TelferYoung (Canterbury) Limited

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Canterbury Newsletter - September 2008

2 October 2008

Welcome to our Spring Edition of the TelferYoung (Canterbury) Ltd newsletter.

The End of an Era

Ian Robert Telfer ("Telf") is to retire from TelferYoung on 30 September 2008.

"Telf" (the face behind the name) has been a stalwart of the valuation profession for over 41 years.  Over this time he has provided great service to our clients and the profession.

The Directors and Staff of TelferYoung wish Telf a long, happy and well deserved retirement.

The State of the Economy

The current climate of economic downturn is a result of falling consumer and business confidence.  There appears to be strong and rational reasoning behind the pessimistic outlook of economic opinion.  This is having a flow-on effect into property as it is with all asset classes.  There are some positive insulating factors, but they tend to be isolated.

Consumer confidence is at the lowest level we have seen since the 1991 recession and as a result many are tightening the purse strings.  Regular media commentaries reinforce the inflationary pressures derived predominantly from upward fuel and food prices.

The following commentary provides an opinion of how various property classes are performing in this uncertain future.

Residential Sector

We have a weaker household sector due to the increases in the cost of living.  Current interest rate levels are preventing some from entering the market.  Lower net migration has impacted demand.  Residential construction has reduced affecting many contractors.  The flow on effect is a decline in the real estate sector where the volume of house sales has fallen dramatically.

Low levels of sales and widespread anecdotal commentary suggests many buyers are holding out for significant price reductions and sellers are not listing at, nor accepting of reduced prices.  This is in effect causing a stalemate. The average time to sell has continued to increase, now at 53 days.  Sales volumes are well down

Commercial Sector

Good returns are still being obtained from well located property with strong leases.  This factor has helped quality property from reducing in value to the same degree as the residential market. 

Broadly speaking over the past 6 months we have seen investors requiring an increased return for commercial property.  Prime properties offering high quality accommodation on long term leases to sound tenants have been less affected, however secondary property values have declined.

The recent auction of National Bank properties illustrates that quality investment property is still in demand with the South Island sales showing a yield range of 5.65% to 7.30%.

These sales reinforce the move to quality investments both in terms of the building and the tenant.

Office Sector

The office market is finally getting what it has needed for years.  Tenants who are demanding better accommodation now have new office developments available to them.

• Latitude Group's - Club Tower, Worcester Boulevard - A grade office accommodation to become Christchurch's first Green building.
• Calder Stewarts - Hazeldean Business Park - 20,000m² of predominately office space at the City end of Lincoln Road
• Amherst Properties - Parkview@22 - Moorhouse Ave - 5 level office building overlooking Hagley Park.
• Henshaw Goodman - Show Place - New office building in a popular office park.

Other substantial office building projects are in the planning stage.

This development activity is increasing the stock of better quality office accommodation.  This will result in tenants moving to better quality accommodation, therefore increasing vacancy levels in lower grade offices.

Many new low rise offices have been developed in various suburban localities.  There are now few suburbs without this type of accommodation which further adds to the supply and choice for tenants.

Retail Sector

Consumers are not in a spending mood.  Recent hikes in petrol and food prices have resulted in consumers with less to spend on other goods.  To compound this pressure many households are coming off fixed interest rate mortgages.  In many cases interest rates on renewal have increased by 2.0% pa further affecting household expenditure. 

Foot traffic in the central city has declined largely due to the development and expansion of suburban shopping centres.  Westfield Riccarton, already Christchurch's largest mall is planned to extend adding another 5,200m² to the current 48,800m².  Suburban developments of this nature are impacting on the central city.

Looking for positives we can see the upcoming personal tax cuts will offset the reduced spending to a degree.  Also a strong rural economy will help some businesses.

Good leasing opportunities will likely appear in the inner city as the retail spend stagnates.  Businesses looking to expand or relocate in this market may have more options and better leveraging than in preceding years.

Financial Institution Instability

Mortgage lending criteria has firmed up due to the global credit crunch.  Money is less abundant giving lenders the option to pick and choose to whom they lend.  Increasing time periods are required to approve loans and lenders are requiring more information.

Summary

The period of high growth over the last few years has outlasted what many had predicted.  In recent years we have heard commentary suggesting a soft landing in the economy.  The economy pushed on and this extra growth will likely enhance the force and depth of the market correction.

The economy is in a technical recession however a number of economists have made reasonably positive predictions for 2009.

Business confidence and expenditure are in a holding pattern.  Costs continue to rise and inflationary pressures are the norm.  Tax cuts are a double edged sword, perhaps reviving the retail sector but also adding to inflationary pressure.

What does this all mean for property?  We see current trends prevailing for the short term.  Good quality property will continue to sell.  Secondary property will suffer from a lack of demand from both buyers and tenants.

A stabilising factor particularly relevant to the commercial sector may be cashed up investors.  Many investors have ridden the property cycle and have sold out at its peak.  They are waiting for the property market to "bottom out", prior to re‑entry.

Back issues of the newsletter can be obtained from TelferYoung (Canterbury) Ltd
Level 4, 
47 Cathedral Square,
PO Box 2532,
Christchurch,
New Zealand.
Telephone: 03 379 7960,
Facsimile: 03 379 4325
Email: canterbury@telferyoung.com

+ Chris Stanley + John Tappenden + Mark Dunbar + Chris Stanley + Mark Beatson + Victoria Murdoch + John Ryan + Martin Winder