TelferYoung (Hawkes Bay) Limited

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Hawkes Bay Newsletter - September 2008

25 September 2008

This newsletter coincides with a very interesting phase in the property market.

Introduction

In particular we are experiencing significantly reduced sales volumes and the emergence of high levels of caution and discernment on the part of potential purchasers. Some sectors of the property market are more exposed than others to the associated pricing realignment. New Zealand's underlying economy is reputedly in good heart and with the positive rural outlook, proposed October tax cuts, the prospect of continued interest rate falls and the downward trend of the New Zealand dollar, the outlook can be viewed as positive. We hope this newsletter assists you in interpreting some of the challenges being faced in the market place.    

Prize Draw

Thank you to everyone that has participated in our survey exercise.  The feedback we receive from this allows us to monitor our level of service and enhance on our commitment to providing high quality professional advice.  The winner for the half yearly draw is Angie Rawlinson.  Remember that every returned survey goes into a draw to win some fabulous Hawkes Bay wines.

Napier Apartment Market - A Convenience or Just A Con?

In August 2006 TelferYoung produced an article commenting on the Napier apartment market.  We expressed concern as to where the apartment market may be heading in the medium term.

"It will be interesting to follow the apartment market, both its own value levels and the impact on other residential properties in the Napier market.  TelferYoung believes there may be an impact on the wider residential market in the $400,000 to $800,000 price bracket.  This market may be affected by those selling in this price bracket to complete their apartment purchase and by the apartments attracting buyers that would otherwise have bought houses in that price bracket."

"Although the apartment market has shown significant growth along with the general property market price increases since 2003, it will be of interest to observe the expected consolidation period as resales occur.  The question is, will there be sufficient affluent "baby boomers" to maintain demand in these preferred locations or will demand and prices wane."

It is fair to say that the apartment market has suffered over the last 12 to 18 months.

Apartments were sold on the concept of low maintenance, high convenience, central position, café culture, access to bars and access to pools and gymnasiums.  But do these conveniences offset the negative issues that include; compact living areas, close community living, noise, less convenient car parking, and lack of private outdoor space?  It appears the market does not think so.  The resale market remains very soft.  There are very few transactions occurring however there is evidence of numerous properties offered for sale.

Sales in the Northridge Complex were quoted in 2006 between $650,000 and $980,000.  We are aware of a recent sale in December 2007 at $800,000.  Two similar better units have been offered for sale at $795,000 with one recent sale at $680,000.

A search of web sites indicates that there could be some 40 apartments available for sale in the Ahuriri area, this mainly between the West Quay and Humber Street Complexes.  Shed 5 has now been completed with several apartments also available in this complex plus there are other smaller complexes available in Ahuriri and on Napier Hill.  Prices vary considerably but many are offered for sale by negotiation with vendors still optimistic of achieving their money back.  In many cases the purchases have been made with a speculative element and many will be likely to come away suffering a significant cash loss. 

It is interesting to question why the market so heavily invested in this sector of property.  Some of the reasons are as follows:-

• The timing of the apartments hitting the market was superb with high optimism in the property market and rising property values.
• The opportunity to purchase at "today's value" through way of deposit but not to have to settle until construction was completed seemed to offer the opportunity to receive a capital gain with no significant capital outlay. 
• Marketing was sophisticated and convincing.
• Pre-sales were at high levels and a naïve market did not ask sufficient questions.
• The concept was new and exciting.

Areas that should have caused concerns were as follows:-

• The relatively high prices of the apartments particularly when viewed against modern housing being built in the city at the time.
• The large number of apartments being built and whether these could be absorbed by the market.
• The fact that many were on leasehold land with ground rent issues to be considered.
• Do the units and in particular the smaller units represent value for money due to their relatively compact size versus a relatively high value.

The limited evidence available suggests that re-sales are occurring at a slow rate and at value levels below what original purchases were made for.  We would anticipate further pain in this sector particularly for the lesser quality units and the smaller units.  One factor that may help apartment competitiveness is the rising fuel prices which may create some locational advantages to those well located units over those properties in more outlying and suburban situations.

For those in the apartment market who need to get out, we would recommend meeting the market presently as we do not see the market improving in the short to medium term.  The market would appear to be significantly over supplied and it would appear that it will remain difficult for the foreseeable future.

There may well be opportunities for those seeking an investment to purchase at discounted levels in the near future.  For those seeking rental investment returns, we would recommend viewing rental returns conservatively, and without reliance on capital growth in the near future.

We further suggest that any purchasers look thoroughly at the Body Corporate issues affecting the apartments, and in particular the likely impact if any of future ground rental rises and how these may impact on capital value.

On a positive note, apartment development has revitalised the Ahuriri location and created a vibrant and desirable location which is of benefit to the wider community.  It is important that the area is supported and that Hawkes Bay people continue to take advantage of our attractive waterfront locations and enjoy the opportunities provided to both visitors and locals alike.

Horticulture Market

There have been no significant production orchard sales in Hawkes Bay since our last newsletter.  However there continues to be a steady number of sales of smaller blocks with a high lifestyle component and in some areas including mature fruit trees.

Early indications for returns for this season's fruit are very positive with some fruit returning as high as $40 (NZD) per export carton. Reasons for this include a general shortage of large apples due to late frosts in 2007, reduced overall production and the New Zealand dollar has weakened against the greenback.

Predictions for the upcoming seasons are for good returns for those producing high quality fruit.

Commercial and Industrial Market

The current commercial and industrial property environment is one where market activity is at its lowest level for a significant number of years as a consequence of the general economic downturn, significant reductions in the volume of house sales, high mortgage interest rates, and high petrol prices.

The demand for leased accommodation has eased and although vacancies remain at relatively low levels the "lease up" time has increased relative to more recent timeframes.  These factors continue to underpin the "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.

Although there are still investors in the market for sound well tenanted property, they are reported to be very selective and discerning.  However where the basic fundamentals are in place, sales are occurring as witnessed on 2 September when a portfolio of South Island National Bank leaseback properties sold on yields between 5.6% and 7.3%.    

There are now some more positive signs in the New Zealand economy, particularly with our over valued dollar moving towards more realistic levels, fuel prices easing and the commencement of the lowering of the overnight cash rate by the Reserve Bank. These factors we expect will give a boost to provincial economies and hopefully hasten the "bottoming" of the present property cycle followed by more activity in the commercial and industrial sectors in Hawkes Bay in the near future.

Residential Market

The residential property markets in Napier and Hastings have felt the influence from a number of negative aspects through recent months, including more restrictive lending practices from the main trading banks, a slow economy, election year, and more particularly low confidence across almost all price residential brackets.

There are a lack of new entrants into the market, this affecting the flow on effect required to allow existing owners to trade up. There is a perception by some buyers that prices may be lower in the future, therefore there is a reluctance to get into the market too soon.

We have seen a significant slow down in the new house market with a number of sections and completed houses coming on to the market at discounted rates, due to an excess of stock.  This lowering of demand for new houses is further flowing down to the residential subdivision block land properties and development sites with significant lower demand for some of these types of properties.  Large sites within the established suburbs of Napier, which had in previous years attracted premium prices in the market, have also shown some easing in 2008, due mainly to lack of demand for infill sites as a result of competing new subdivisions in Napier, and also, the reduced development margins.

Overall, sales volumes have generally been at very low levels through 2008, and we expect buyers will continue to show caution until at least late into 2008 early 2009 when there is likely to be more certainty in the economy.

Back issues of the newsletter can be obtained from TelferYoung (Hawkes Bay) Ltd
email: telferyoung@hawkesbay.telferyoung.com

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