TelferYoung (Hawkes Bay) Limited

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Hawkes Bay Newsletter - December 07

4 December 2007

Welcome to our last newsletter for 2007, which comes at a time when interest rate increases appear to have finally curbed the property boom.

Introduction

The residential sector is currently subject to slower market conditions and stable to softer market value levels.

Commercial investors appear more discerning but with good quality properties, subject to strong leases, appearing to have strengthened in value over the period. This has been particularly evident in the industrial sector which appears to have caught up the previously better regarded commercial market.

The flow on effects from the last summers and autumn drought and the impact of the high New Zealand dollar on exporters will continue to impact on the Hawkes Bay economy, however we are predicting relatively stable property values in the rural sector.

The winner of our customer survey lucky draw is Deborah Laurent-Brown. We thank her and the other respondents for their time and feedback as we strive for continual improvements to our services.

New Staff Members

We welcome Mark Apperley to our team as a graduate valuer.  After completing his Massey degree, Mark has worked in the United Kingdom for several years in the finance and leasing sector and joins us with valuable business knowledge.

Frances Duley joins our reception and administration team from a Navy background including being a Morse Code expert.

Pastoral Market

The pastoral market remains reasonably steady in spite of a difficult background situation.  The spring conditions have been mild but relatively dry and already significant concern is being expressed for the coming summer season.  This is on the back of a very dry autumn early winter period.  Most farmers are currently down on stock numbers from the effects of the dry autumn period and if this summer remains dry, and stock numbers can not be brought up to normal levels for the 2008/2009 season, the implications will be very serious.

Despite this situation, farms have been selling at consistent levels and there appears to be a reasonably stable market evolving.  Recent sales of note include the following:-

•          TeKuta on Waikare Road, Putorino sold at auction in November for $5,300,000, this 540 hectare property carrying some 7,000 stock units.  Sale price equates to $756 per stock unit.
•          2111 Taihape Road sold in October 2007 for $2,150,000.  This is a 232 hectare mainly medium hill country property analysing to $793 per stock unit, carrying 2,700 stock units.
•          An easy contoured property bounding the Ngaruroro River in the Crownthorpe area at 2029 Matapiro Road sold in October 2007 for $4,350,000.  This property carried approximately 3,600 stock units with the sale price analysing to $1,206 per stock unit.

The influence of the dairy sector buoyancy has been noted in the market.  The Matapiro Road property above sold to an adjacent dairy farm operation.  In July, a 277 hectare property on State Highway 50 at Takapau sold for $5,500,000 equating to $1,612 per stock unit with the land value on the flat Takapau soils analysing to approximately $18,500 per hectare.  This property was bought by an adjacent dairy farmer and is understood to be mainly utilised as a run off block.

There have been other cropping land sales in the Takapau Plains area in the $18,000 to $19,000 per hectare land value range for better quality cropping soils.

We anticipate the market could be reasonably soft over the next six to 12 months on account of the relatively high interest rates, the strong New Zealand dollar and dry farming conditions.

However we do not expect to see major price movement, perhaps with the exception of smaller less attractive sub-economic units which if not well located, could become difficult propositions to sell.

Horticulture Market

There have been a limited number of pipfruit orchard sales since our last newsletter. The productive value of land and trees remains steady at the $70,000 to $75,000 per hectare. The industry remains under pressure with respect to farm gate returns. The New Zealand dollar remains at high levels and costs of production continue to rise especially for fuel, labour and compliance.

The growing season ahead comes with additional challenges, namely late autumn frosts which have seen high levels of crop losses in some localities. This may have positive results with respect to export carton returns however volumes will be well down. Overall, net returns to growers are envisaged to be unchanged. Vineyard production in many areas will also be down on account of the frosts. In brief, the external pressures on growers will continue to provide a number of challenges going forward. We envisage values to remain steady with continued rationalisation within the industry.

Industrial/Commerical Market

The commercial and industrial property investment market in Hawkes Bay has continued in relatively strong mode despite interest rate increases through 2007.  These interest rate increases, coupled with a little more uncertainty in the local economy, are causing investors to become more discerning in their purchases with tenant strength and lease terms becoming more critical aspects in the investment analysis process. 

The demand for industrial accommodation appears to have eased a little and although vacancies are at low levels, the “lease up” time has increased relative to more recent time frames.  These factors are underpinning the re-emergence of a “two tier” market for commercial and industrial property with a widening gap between yield rates on strongly tenanted property and property that is sold vacant.

Strong demand within the price bracket up to $2,000,000 continues for leased property from the local sector while properties above that level are saleable to a more restricted sector of prospective purchasers, generally from outside of the district or otherwise for syndication purposes.

Exemplifying this strength is the comparison of the October 2006 sale of the Dunlop Road meat processing facility leased by Bay Cuisine which sold on an 8.10% yield with a 15 year lease term and CPI rent review clause.  This sale at the time was considered extremely strong for an industrial facility of a specialist type nature compared to earlier in the year (April 2006) a food processing plant sold on a sale and lease back with 10 year lease on a 9.33% yield.  These examples compare with the recent sales of Onekawa sites with Plumbing World and Office Products redevelopments in Wakefield Street showing yields of 7.10% and On Road New Zealand in Taradale Road selling on the basis of a 6.41% yield with leases of 8 to 12 year duration. 

In Hastings, a property in Heretaunga Street West sold in August showing a 7.32% yield with new ten year lease to Hawkes Bay Seafoods.  Two new developments are to commence shortly on sites fronting Omahu Road with these developments proposed to provide warehouse and associated space for substantial tenants on long term leases.

The market activity of recent times has also seen the elimination of the differential between prime industrial and commercial property where previously in general terms a 1% higher yield was evident for industrial property. The above mentioned sales however, when compared to recent commercial sales show that the differentiation has been eliminated.  For example the Video Ezy premises on the high identification site of 2 Thackeray Street/Dickens Street Corner sold on a 6.80% yield being large format retail property with a national tenant, unexpired lease term and CPI rental increase clause while the redevelopment of the inner city former Mitre 10 site has a sale pending with two national retailers contracted to six and eight year lease terms on the basis of a yield of approximately 7%.

Accordingly, our perception is that the market continues to be strong for well leased commercial or industrial property in spite of increased interest rates, which appear to be calculated by investors to be of a short term nature relative to the proposed hold term of the investment, and expected capital growth.

Residential Market

The residential property markets of Napier and Hastings have seen a substantial slowdown in sales volumes in the late winter and spring of 2007 and it now appears to be a buyers market.

The past 18 months has seen the market stabilise substantially following the boom period of 2002-2005.  This stabilising effect has seen some localities beginning to correct themselves, though still with many vendors having higher expectations than is justified with a reduced number of purchasers that are now more discerning.

This lessening of demand and cooling of the residential market is due to a combination of factors including higher interest rates and lower prospects of capital appreciation.  The residential floating interest rate is now at 10.55% for the main trading banks, but fixed rates in the 2002-2004 period were below 7%.

Over recent months, buyers have noticed a lack of price appreciation which gives them some confidence that they need not rush to make a property purchase, as they believe it is unlikely that values will increase over the next 12 months.

The fact that residential property purchasers now have time on their side, has often not sat well with current vendors who over the 2002-2005 period became accustomed to properties selling quickly at healthy price levels.

While in some localities and price brackets, property values are holding up well in this new market other property, including apartments, has experienced a easing in value levels. With the recent completion of the Humber Street apartments, the apartment stock in Napier City has increased, with a number on the market, some at reduced price levels. Other sectors of the market that appear under pressure are coastal properties and some of the higher priced residential properties.

Christmas Wish

Thank you to all those who have supported us during 2007; we wish you an enjoyable Christmas break and a prosperous New Year.

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