TelferYoung (Canterbury) Limited

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Canterbury Newsletter - December 2009

21 December 2009

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

THE INVESTMENT MARKET

The economy has begun to grow although the recovery is rather fragile.  Business confidence is increasing and there is certainly more confidence in the investment property sector.

Demand

There is strong demand for well leased quality property especially in the price band below $5,000,000.  Returns available from commercial property are attractive when compared to fixed interest and this coupled with low mortgage funding rates has stimulated the investment market.

There is more liquidity in the market even for higher priced properties.  There has been a significant change in the dynamics for large scale property investments.  These properties were historically targeted by property companies and institutional investors however many of these large scale buildings have been placed on the market.  We have seen the return of property syndication as well as high net wealth private investors becoming more active in this market. 

Prime investment yields fall in a range of 7.25% to 7.75% for quality buildings held under long term leases to A Grade tenants.  The strongest market is in the lower price range.  A recent sale of interest is for a design build property for Blackwoods Paykels at 1 Baigent Way, Middleton.  This property was purchased in August 2009 for $3,850,000.  It is subject to a ten year lease to show an initial yield of 7.75%. 

Supply

A relatively high volume of investment property is currently on the market.  Many of these would be considered to be B and C Grade investments due to one or more of the following factors:

• Location
• Tenant quality
• Building quality
• Residual lease terms

Astute investors for this class of property are demanding a significant yield premium to reflect the inherent risk.  In addition these properties require a greater equity input as debt funding is significantly harder to obtain.

There is a limited amount of quality investment property on the market.  Any quality property released to the market has met with strong investor demand. 

The Leasing Market

Leasing for all classes of investment property has been very slow over the last 18 months. 

There have been increasing numbers of vacancies with very limited tenant demand.  Some of the greatest vacancies have appeared in the retail sector especially in some of the strip retail shops in suburban areas.  There are also increasing retail vacancies in the CBD.

In the office sector there is greater choice available for tenants wanting quality buildings.  There is increased competition from the office parks such as Show Place, Hazeldean Business Park, Addington Business Park and the Technology Park.

The increased supply is placing pressure on rental rates and also requiring owners of the existing stock to consider substantial refurbishment to retain tenants.

In the industrial sector we have seen significant vacancies in the smaller owner occupier market.  There are a large number of these units currently on the market for sale or lease.

There have also been increased vacancies in the larger scale industrial warehousing sector especially for older style buildings which are now becoming obsolete due to deficiencies in design. 

Over the last six months we have seen an increase in tenant inquiry.  This reflects the increase in business confidence and we believe leasing activity will increase in 2010 especially in the industrial sector.

Tenant Retention

Retaining a quality tenant is paramount in the current environment.  It is important to build a strong relationship between landlord and tenant.

Retaining the capital integrity of an investment property requires proactive management.  Both the landlord and tenant should be in open dialogue well prior to any lease expiry or rent reviews.  It may be advantageous for both parties to forego the opportunity for rental review to ensure retaining the tenant and extending the lease term. 

Summary

The investment property market has become more active over the last six months.  We believe this will continue in 2010 as confidence returns to the New Zealand economy.  There are opportunities are available for astute investors in these uncertain times.

CHRISTCHURCH RESIDENTIAL PROPERTY MARKET

The Christchurch residential property market has mirrored the New Zealand trend with an increase in sales volumes and buyer demand.  The improvement started in February 2009 and average selling prices over three months to November increased by 2.8% above the same period last year.

This is certainly a positive turnaround from the average 7.6% decline in sale prices from the market peak in late 2007. 

Major factors contributing to this recent trend are:

• Historically low mortgage interest rates
• Positive increase in net migration
• Limited supply of property on the market

The entry level sector of the market has provided the strongest value gains, with competition from investors and first home buyers stimulating prices. Higher valued properties have gained momentum in more recent times reflecting more realistic price expectations of vendors and purchasers. 

Section sales have also improved. Over the last four month period, average monthly sales were almost four times the market's low of 21 sales for the month of October 2008. Sales are still almost half the volume when compared to the market's peak in September 2007.

The residential investment market has been negatively impacted by falling rents particularly in studio, one bedroom, and to some degree two bedroom properties.  Affordability is the key driver of tenants with many impacted by employment prospects.  As a result many are staying at, or returning home or grouping together in larger flats.  Consequently landlords have attempted to maintain occupancy by refurbishment or reducing rent levels. This ultimately reflects on sales prices.  Whilst prices have fallen from 2007 levels, property is a long term investment.  Prices have doubled over the last ten year period.

Summary

The Christchurch residential and lifestyle property market has experienced increased activity and value increases albeit relatively modest. Market activity is reliant on the New Zealand and global economies continuing to improve.

We are aware that floating interest rates and fixed short term rates will undoubtedly increase by mid 2010.  Net immigration is also predicted to drop as more New Zealanders migrate to Australia as their economic recovery accelerates.

Taxation issues surrounding residential investment appear high on the Government's agenda.  While we do not anticipate a capital gains tax will be introduced we do perceive taxation benefits will be targeted.  This may impact on the residential investment market.

However we cannot overlook the fact that property prices force of are subject to basic supply and demand. The market will ultimately dictate what fair value is irrespective of external interventions.

Given all available information and the plethora of economic opinion we anticipate modest price increases continuing across all sectors to mid 2010 where a leveling off of values and sale volumes will occur.

TelferYoung (Canterbury) Limited thank you for your continued support and we look forward to continuing our association in 2010. We wish you a very Merry Christmas and a safe and happy New Year.

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