TelferYoung (Hawkes Bay) Limited
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Hawkes Bay Newsletter - August 2007
7 August 2007
Welcome to our winter newsletter. Winter 2007 sees the property market at a most interesting stage in the economic cycle where an element of nervousness and caution prevails in the market.
With interest rates at levels unseen since the mid 1990's it appears that nationally these rates are starting to have some impact on the number of house sales. However with immigration remaining at an above average level we appear to be heading into an average housing market in terms of the number of house sales but certainly not a weak market. Further, with the signals emanating from the Reserve Bank that further rate hikes are potentially off the agenda and with interest rates expected to settle at somewhere around the current level over the next few months, we are not likely to see the level of house sales at dangerously low levels through 2008.
The fundamentals suggest that house price inflation could be close to peaking and that stabilisation, with some downside risk will prevail from here.
The commercial sector continues to experience a shortage of good quality well leased property to satisfy investors.
We at TelferYoung (Hawkes Bay) Limited have joined the migration to Ahuriri/Pandora and have just completed our move to new premises in Pandora Road which became necessary as a consequence of our expansion and some parking congestion at our Milton Road premises. After a successful 'make over' to the building we are now enjoying our fresh new premises which have associated with them abundant car parking facilities giving our staff and clients easy access.
We now invite you to read the following overview of the various sectors of the property market and invite you to contact us if there are any specific property related queries which you may have.
Pastoral Market
The pastoral market has been reasonably active over the last few months due to in part the winter being the traditional selling period. The big issue facing farmers has been the very dry autumn/early winter followed by cold rain resulting in severe feed shortages. This will impact in a major way on farmers' incomes this 2007/2008 year where most will be facing cash deficits.
Also the New Zealand dollar has been very high although with some relief evident at the time of writing.
On a positive note, dairy farm incomes look very sound and dairy run off land will likely be well supported by this sector.
We anticipate a reasonably flat period in terms of prices in the coming months. Recent sales have been at similar levels to those in the near past and the market has held well in spite of the drought and high New Zealand dollar. However, some farmers may be placed in untenable positions from the drought and this may lead to some sales with a forced element. It appears that banks are prepared to support the farmers in the short term but longer term viability will be an issue over the next 12 months.
Recent sales of note include:-
- Edenham Station, Atua Road
$17.8 million, $9,400 per hectare, $819 per stock unit. A substantial unit with a large area of easy land.
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Crownthorpe Settlement Road - 191 hectares - $2.1 million, $11,583 per hectare, $907 per stock unit. Easy contour block with good dwelling and handy locality.
- Puketitiri Road - 301.7 hectares - $2.7 million, $8,950 per hectare, $840 per stock unit. Well located, easy medium hill block with QEII reserve.
- Carswell Road - 433 hectares - $2.6 million, $6,005 per hectare, $740 per stock unit. More outlying medium hill block.
Horticulture Market
Values continue to remain steady in the orchard sector with no significant growth in capital values since our last newsletter. We are aware of a number of well established growers who are now looking at exiting the industry with the long term future for primary produce being somewhat uncertain. The high level of the Kiwi dollar against the greenback continues to put pressure on farm gate returns. While there was an air of optimism at the beginning of the year with the dollar in the early to mid 60 cent range this has now been eroded as the dollar has achieved a post float high in excess of 81 cents. A follow on from this is the evidence as we drive around the Heretaunga Plains and once again we are seeing large volumes of trees being removed.
There have been two resales of large production block within the past three months. A property in Franklin Road comprising some 18.9 hectares of mixed pipfruit and kiwifruit plantings sold in late 2005 for $1,515,000 and has recently resold for $1,750,000. Improvements include a large packing shed. Also a property in Allen Road of some 40.9 hectares similarly comprising pipfruit, stonefruit and kiwifruit sold in 2003 for $2,460,000 and has recently resold for $2,800,000. Both sale prices include a similar level of plant and machinery, with structural improvements comprising various sheds. The levels of capital value growth are in line with annual inflation.
We envisage a continuation of the rationalisation of the fruit sector with emphasis on scale of production with small growers looking at options going forward. Market values are predicted to remain steady.
Industrial Market
The Onekawa industrial area has seen a good level of activity in the early part of 2007 with a number of sales recorded, these sales including:-
- Small workshop building with front office/amenities area situated in Sheffield Place on a site of 1002 square metres selling in April 2007 for $391,000.
- Workshop or warehouse building situated on a prominent corner site in Austin Street selling in April 2007 for $372,000.
- More substantial warehouse with front showroom area situated in Dunlop Road, selling in May 2007 for $655,000. Property sold vacant but having net yield of 9.11% on our assessment of market rental.
We are also aware of a pending sale of a substantial warehouse building with two storey office/amenities portion, the sale price of this property being $1,500,000.
The Hastings industrial property market has not been quite so active, but recent sales of note include a substantial industrial property on a corner site fronting Omahu Road, selling with vacant possession in April 2007 for 2.3 million dollars.
A further property fronting Omahu Road has recently sold by tender through City Commercial Real Estate. Sale price presently confidential but shows 8% yield on existing rentals being obtained from the four tenancies. Property also includes area of some 2000 square metres suitable for further development.
Commercial Market
The commercial property market currently reflects a similar tone to the general property market whereby a certain element of caution prevails.
There continues to be a substantial amount of investor interest and available funds looking for placement within the market and accordingly properties with the key fundamentals of location, quality of tenant, quality of building and good leasing conditions remain strongly sought after as exemplified by the following examples:-
- Thackeray Street, Napier - Sold $1,500,000, net return 6.80%, five year unexpired lease term with Consumers Price Index market rent review provisions, national tenant.
- Karamu Road, Hastings - Sold $4,225,000, 7.29% net return, 10 years unexpired lease term, national tenant.
Development of new commercial office premises in Napier and Hastings in the recent past presents an availability of new accommodation which has, on account of the supply dynamics of the market, stabilised rental growth.
Rent reviews within the market have seen healthy rental appreciation which, combined with the current yield rates of 7.0%-9.0% generally, have resulted in consolidation of value levels.
Residential Market
Most residential localities in the twin cities of Napier and Hastings have experienced lower demand throughout autumn and early winter of 2007, this resulting in lengthening sale periods, and on occasions, reduction in sale price from earlier levels, although very slight value increases have occurred in the bulk of the localities.
Recent publicity around property price increases in Hawkes Bay has centred on properties in the upper price bracket which regularly attracted new record high levels, and mid priced homes which have seen values increase up to 100% from mid 2002 levels. However if we look at the cheapest houses sold in Napier this year, they (on average) have increased by over 145% from a selection of lowest priced houses sold in 2002.
There has also been a lot of talk about interest rate increases and how they have affected property purchase decisions. A traditional property investment over the years has been a block of residential flats. Investors frequently borrow the bulk of the purchase price to fund the investment. Our research indicates that investment yields in 2002 were closely aligned to or above variable first mortgage interest rates giving positive cashflow to the residential investor.
Variable first mortgage interest rates in 2002 were on average 7.56%, while our analysis of residential investment block sales shows an average net yield (not allowing for any maintenance or management) of 10.5% which indicated that the average residential investment property had on average a positive cashflow of over $9,000 per annum.
In 2006, interest rates had increased to 9.55%, while net property investment yields had fallen to an average of 7.1%. The effect on investment properties is that they now have a negative cash outflow of over $10,000 per annum on average. Depending on the amount borrowed to fund the investment, this reflects the maximum amount the investor is required to top-up the mortgage payments to satisfy debt servicing.
Residential property investors are now showing that they are willing to incur a cash loss on their investments as long as they get value appreciation, however factors such as interest rates increase, changes in depreciation allowances, and at times difficulty in passing on rental increases to stable, long term tenants, will further increase deficits for these property investors.
Back issues of the newsletter can be obtained from TelferYoung (Hawkes Bay) Ltd
email: telferyoung@hawkesbay.telferyoung.com
+ Max Plested + Mike Penrose + Trevor Kitchin + Derek Devane + Andrew White + Andrew Chambers + Hugh Peterson + Kayan Ho + Mark Apperley
Opinions expressed in this newsletter are of a general nature and should be used as a guide only. TelferYoung should be consulted before acting on this information.