TelferYoung (Hawkes Bay) Limited
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Hawkes Bay Newsletter - May 2008
15 May 2008
Welcome to TelferYoung (Hawkes Bay) Limited's Autumn Newsletter.
Introduction
This newsletter is written within an environment of general economic downturn, significant reductions in the volume of house sales, rising mortgage rates, surging petrol prices and speculation that the housing market is likely to experience a decline in price levels of 7% to 10%.
Despite the number of dwelling or house sales falling significantly in March the national median house price is now down only 1% from the peak in November last year. Where to from here is the burning question.
The impact of the interest rate increases through 2007/2008 appears now to be gaining the traction which the Reserve Bank has desired in its quest to control domestic inflation, which ironically, is as a consequence of the low interest rate environment over recent years created by the Bank itself.
If you are fortunate enough not to be pressured into selling as a consequence of these higher interest rates, then the market is the same for buyers and sellers so that in relative terms if you are a seller "you are able to buy on the same market"!
We hope you find the various property market sector commentaries of interest.
Pastoral Market
While significant parts of the country have been affected by dry summer conditions, Hawkes Bay has only had moderately dry conditions in the most part although some areas have been dryer than others and more affected. The recent rain should ensure good growth before the winter sets in and hopefully a return to reasonable grass growing conditions for the winter and spring period.
The pastoral market remains at reasonably steady levels. Whilst there is an expectation that prices will fall as a result of continuing high interest rates, a strong New Zealand dollar and only moderate returns for all sectors except dairying, to date the market continues to be reasonably resilient with only modest price adjustments evident.
The strong sector of the rural market remains in the dairy industry. There are limited dairy farms in the Napier/Hastings area however there have been some recent sales. A dairy farm
in the Patoka area sold in February, this property being a 484 hectare block producing some 370,000 kilograms of milk solids and analyzing to $39.19 per kilogram of milk solids. This level is significantly lower than Waikato and Taranaki where prices are now in excess of $50.00 per kg of milk solids.
A larger unit in the same area involving 634 hectares producing 444,000 kg of milk solids sold for $14,300,000 or analyzing to $32.23 per kg of milk solids, and a Central Hawkes Bay unit producing 140,000 kilograms sold for $34.53 per kilogram of milk solids.
Continuing on a dairy farm theme, a property in McLeod Road, Onga Onga involving some 329 hectares sold in March for $5,300,000, this property suitable for dairy conversion.
Hill country properties continue to sell in the range of generally between $600 to $800 per stock unit depending on location and contour with better located and stronger properties with either dairy run-off or fattening potential still selling in the order of up to $1,000 per stock unit.
We anticipate a slight continued softening in market conditions in the short to medium term on account of the continuing high interest rate environment and modest farm returns. The exception will be for those properties with dairy conversion and/or run-off options. These will likely be keenly sought after on account of the strong returns currently applying in the dairy sector.
Horticulture Market
The horticultural property market has been very subdued with owners and growers focussed on the harvesting of fruit since our last newsletter. Indications are that this season's returns per carton will be up on last year however the increase in revenue has been off set by the strength of the New Zealand Dollar against the Greenback which remains steady around the 79 cent mark.
We envisage a number of growers taking stock of their positions at the end of the season and making decisions about the future from there. We are aware of a number of orchard properties where trees have been removed recently and would comment that there will be continued rationalisation within the industry which could include leasing of smaller blocks and/or tree removal and alternative land use options being implemented. Overall capital values remain steady and in the short term we anticipate this to remain unchanged.
Commercial Market
The commercial property market is in a most interesting state at the current time on account of the general economic environment sending signals for the exercise of great caution
as the market deals with interest rate levels which are at levels last seen in 2000-2001 (as they were on their way down), domestic inflation above the Reserve Bank target range of 3%, being at 3.4% for the year ending March 2008, and a residential market which is sending out negative sentiment on account of falling house sale numbers.
It is apparent that there continues to be investors within the market however they are now exercising a great deal more caution than has been evident over latter years.
The situation remains that where the basic fundamentals of "good property" are in place there is investor interest and sales are being effected.
Sales within the commercial sector in the first quarter of 2008 include the following examples:-
| Emerson/Dickens Streets, Napier |
| Yield 8.1% |
| Emerson Street, Napier | Yield 7.1% | |
| Dickens Street West, Napier | Yield 8.0% | |
| Thackeray Street, Napier | Reputed 6.8% | |
| Heretaunga Street East, Hastings | Yield 7.93% | |
| Queen Street West, Hastings | Notional Yield 9.33% | |
| Omahu Road, Hastings | Yield 8.24% |
These properties are selling for prices between $290,000 and $5,000,000 and the yields reflect virtually similar levels to those which would have been expected in late 2007. However where property has tenancy difficulties or vacancies, market resistance has emerged and yield levels are increasing resulting in relative price level reductions compared to price levels in the market over the last two or three years i.e. the "two tier" market divergence continues.
The prime retail locations continue to have low vacancy levels and recent activity confirms that interest for retail accommodation continues in the prime locations.
The pending relocation of Caroline Eve's Napier premises from Emerson Street into the Ocean Boulevard Arcade resulted in three prospective tenants for the accommodation being vacated, with "the winner" securing the tenancy by offering a respectable rental increase over that prevailing in the market for that location.
Further, the pending redevelopment of the former ‘Sportspower' tenancy in the heart of Emerson Street is as a consequence of a new tenant having been secured by the developer.
Industrial Market
As with the commercial market, there has been a general slowing in activity in the industrial sector in recent months. Although vacancies are at historically low levels, more vacancies are emerging and any vacant space becoming available is taking a longer period to re-let than was the case in the 2005-2007 period.
The volume of sales of industrial property has also slowed although yield levels appear to be holding. In March, a property in Wakefield Street, Onekawa, sold for $920,000, showing an 8.63% yield on existing rentals. This property was in four tenancies of varying lease terms.
Another industrial property in Onekawa has recently sold at $900,000 on a vacant possession basis. The net yield on notional rental was 9.53%.
The previous Pacific Bark property in Severn Street has been subdivided into bare industrial sites of between 1500 square metres and 5000 square metres. We understand these sites are under contract in the range of $170.00 per square metre to $200.00 per square metre.
Developments in the industrial market will be watched with interest, and we expect as with commercial property, that yield rates on prime soundly tenanted and well located industrial property will remain at present levels with yield rates for property in the "second tier" increasing slightly, which could have a negative effect on some values.
Residential Market
There has been significant amount of media comment in recent months regarding the residential property market.
In early 2008 within Hawkes Bay the residential market has been characterised by low sales volumes, long selling periods and a lack of buyers.
This lack of buyers has meant that generally the bulk of property selling had been on behalf of vendors who had been willing to reduce their price to meet buyer expectation, this being particularly evident in the higher price bracket.
Higher interest rates have been partly to blame and we have seen a distinct lack of interest from residential property investors in the market in recent months.
Interest rates have been relatively high over the last three years and residential investors have been prepared to subsidise mortgage payments out of their own pocket, as capital gains were a relative certainty. The market is now showing no prospect of short to medium term capital growth, and residential investors are now questioning the wisdom of owning a property for which the rental income does not cover the mortgage and outgoings on the property.
The lack of purchasers in the lower to lower/medium price bracket has freed up the opportunity for first time buyers to get their first foothold on the property ownership ladder, this mostly at the expense of the vendors.
There appears a ready supply of new homes available for sale within new subdivisions in the cities of Hawkes Bay. We understand that some lending institutions are now less enthusiastic about lending on proposed new dwellings and that may have some impact in this sector.
On an occasional basis, we are seeing a small number of houses mostly in new subdivisions selling at levels that they sold at in 2004, indicating that though prices had risen above 2004 levels, we are now back towards those levels in some situations.
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.