TelferYoung (Hawkes Bay) Limited

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Hawkes Bay Newsletter - December 2008

16 December 2008

Welcome to this final newsletter for 2008.

Introduction

The year has certainly been challenging with a general easing in market conditions for the first three quarters.  The financial global meltdown in the last quarter has hit hard and there has been a further adjustment in value levels as a result.  Market conditions remain tight but easing interest rates and the lower New Zealand dollar may help stimulate the export based recovery required.  We anticipate conditions remaining tight going forward, but are hopeful of improved market activity from the current low base.  We recommend obtaining sound advice before committing to your property related decisions.

Thank you for your support during 2008.  We wish you a happy and enjoyable Christmas break and look forward to working together in what will be a challenging and exciting 2009.

****Prize Draw****

Thank you to all who returned the survey responses and provided feedback.  Survey forms are sent out randomly to clients who have used our services over recent months and all names are put in to a draw to win some fabulous Hawkes Bay wines.  The feedback provided is extremely useful in making sure we maintain a high quality of service to our clients. 

The lucky recipients of this prize draw are:-

Klai & Christina Anderson, Miriam Groshinski, Simon Dunn, Warren Sharp, Shane Morrell and Vaughan Walsh.

All winners have been notified.  Please keep the survey responses coming.  Next prize draw is mid 2009.

Residential Market

After a strong growth phase from 2002-2006, followed by a levelling off period, the property market is now facing downward pressure, with reductions in value for many localities.  Buyers have become less willing to commit with their expectations being for further reductions in value and in interest rates.

The international credit crisis is now impacting on economies worldwide and uncertainty continues in financial markets with expectations of global recession, low growth levels and possibly, a protracted recovery period. This international situation is likely to have a negative impact on the already subdued New Zealand property market, with much reduced economic confidence going forward.

Although we anticipate difficult market conditions for some time, there are positive factors which may influence the market including recent and further proposed tax cuts, the downward interest rates trend and recent significant reductions in fuel prices. These and the mainly positive reaction to the prompt formation of the new government may help stimulate sales activity from their current low levels.

 We have carried out analysis of residential sales volumes for the periods of November 2006 to November 2007, and November 2007 to November 2008 to determine what change has occurred in sales activity for residential properties only.  Different sectors of the market were analysed, with the results showing staggering drops in the number of sales for the respective periods and price brackets.  The following illustrates graphically the results of our analysis.

The graph below illustrates across most price brackets an average reduction of sales of between 60-70% between the two periods.  The upper medium price bracket of $600,000 to $800,000 has shown the least decline in sales volumes with on average a 50% decline in sales volumes, compared to the lower and higher price brackets.

Further, analysis of resales of properties in the 2007 to 2008 period indicates a median decrease of 7.7%, while the median residential sale price for 2008 is $310,000 compared to $316,500 in 2007 and $300,000 in 2006.  Not surprisingly, our analysis shows that vendors in a reasonably comfortable selling position our more likely to receive realistic sale levels.  Those under pressure to sell are seeing large discounts applying.  It still appears evident however that some correction in some price brackets is still likely to occur, particularly in the $200,000 to $400,000 bracket where sale volumes have diminished significantly.

In earlier times property owners who had not been able to secure a contract for the sale of their house have simply placed their house on the rental market until market conditions have improved. A complicating factor in the current market is that the residential rentals additionally have been declining and in some lesser regarded situations there have been vacancies for some period awaiting a tenant to occupy the property.

Residential property investors, who had let their properties in strong rental markets from the period 2004 to 2007, are now finding that securing a tenant for the same property is proving difficult, this placing further pressure on cash flow for these rental investors and limiting their ability to further enter the market to purchase more investment properties.

In previously stronger market conditions, we saw some purchasers from overseas (especially Australia) show interest in lower priced, high yielding, rental investment properties, however this demand has

lessened significantly providing a lower pool of prospective purchasers and lengthening the sale period for property owners.

Overall, we expect market conditions will continue to be tight with purchasers remaining cautious into 2009.

Pastoral Market

The pastoral market has been very quiet over the last six months.  Real Estate Institute statistics indicate only nine sales of rural blocks in Hawkes Bay over 100 hectares since the beginning of June.

The market has been affected by the general economic downturn, falling commodity prices and the generally difficult climatic farming conditions that have prevailed over the last 18 - 24 months.  We also understand the main banking institutions are being more conservative in their lending policies and are not supporting new purchasers or additional lending, unless there are strong cash flows evident.

For those properties that have sold, prices have been reasonable though we may now be beginning to see a general easing.  With the reduction in dairy payouts announced recently, there will likely be an adjustment in prices paid for dairy support property.  A recent sale on State Highway 50 near Takapau sold last month, down between 10-15% on previous levels.

However offsetting that was a recent sale in Ngahape Road, Waipukurau, at $2,750,000 for 257 hectares of easy hill country, this analysing close to $1,000 per stock unit.

There are a number of properties on the market with possible sales in the next few weeks.  Our expectation is that the better located and better quality properties are likely to attract solid demand.  If the purchasers for those are cashed up, sales could be achieved at value levels similar to those which have been paid recently.

However for the less attractive properties and particularly where new borrowing is required, we could see some adjustment in value levels applying in order to allow incoming purchasers to buy at levels that banks are willing and able to support.  For the next few months, we anticipate challenging market conditions.  Though interest rates and the New Zealand dollar are falling, there will possibly be a corresponding decrease in commodity prices and if the current dry conditions take hold, market conditions could become relatively difficult. On the other side with the decrease in interest rates and possibility of improved returns from a lower New Zealand dollar, market conditions could be reasonable.

At this stage we will happily sit on the fence and wait and see where the market goes, but we expect at least some easing in values generally.

Horticulture Market

The horticultural sector of the property market has been very subdued since our last newsletter.  Two recent sales indicate that productive land and tree values have eased to between $50,000 and $55,000 per hectare.  The turmoil of the greater world economy has created a great deal of uncertainty, which in turn has meant that producers have focused on maintaining their current position versus expansion.  With the difficulty to secure funding, the number of potential lifestyle purchasers has fallen.  The lifestyle purchasers have underpinned the orchard market for a number of years now.  With the reduced pool of potential purchasers we envisage some downward pressure on land and tree values still remaining.

The reduction in value is primarily related to the added value of the fruit trees.  These last peaked in 2005 and 2006 at $25,000 per hectare but currently the added value of trees is within a range of $5,000 to $10,000 per hectare, depending on variety, age and condition.

The good news is that the New Zealand Dollar has fallen against the Greenback, fuel prices have eased significantly (lowest level since February 2007) and interest rates are under significant downward pressure.  The forecast OCR by mid 2009 is 4.5% and for unhedged exporters this should provide some insulation.

Commercial and Industrial Market

The commercial and industrial market over the past three months or so has been typified by low volumes of sales compared to those occurring in the 2004-2007 period.  Purchasers have been taking far longer to commit with there having been relatively little interest in property on the market, uncertainty over interest rates and a general tightening in the availability of finance.  As has been noted before, investors in commercial property are giving lengthy consideration to lease terms, strength of the tenant and possible future uses of the property before making any commitment to purchase.

Three adjoining properties in the Onekawa industrial area have recently sold on a vacant possession basis at sale prices between $450,000 and $615,000.  These buildings provide medium size industrial showroom accommodation in a well identified situation with yield rates on notional market rentals of between 8.9% and 9.8%.  Two years ago, we would have expected these properties to sell on a vacant possession basis in the 9.0% to 9.25% range.  These sales reinforce our opinion that yield rates for commercial and industrial property have moved out by around 0.5% from those yields obtained at the height of the boom.

Yield rates at these new levels are beginning to appear very attractive considering the cost of mortgage finance, interest on bank deposits, returns on Government Bonds and other forms of investment, all of which have been or will shortly be affected by the recent large reductions in the Official Cash Rate.  This is expected to further stimulate interest in the commercial property market.

It appears that if the fundamentals of good property are in place buyers are in the market with net yields on recently recorded sales of note including:-

• Aon, Hastings - 7.96%
• Coffey Davidson, Hastings - 8.5%
• Soda Bar and Gowns on Gloucester, Taradale - 6.1%
• Countdown, Napier - 8.25%
• Westpac Bank, Taupo - 4.84%
• Westpac Bank, Hamilton - 6.1%

There has been a good level of interest shown in proposed industrial sites within a new subdivision of a 2.376 hectare block in Mersey Street, Pandora, and there is a pending re-sale on one of the bare sites in the Severn Street subdivision at a level slightly in excess of the original contract price negotiated some 18 months ago.  These factors indicate that there is still a good level of demand for vacant industrial land.

In regard to rental levels for industrial and commercial space, we are seeing mixed feedback from the market place with a new letting of a substantial modern warehouse in a high profile industrial situation being made subject to a new lease at a rental some 10% below what we consider to have been the market rental approximately one year ago.  Another recently negotiated new letting, this time in the Ahuriri area has been re-let at a market level very similar to that prevailing in 2006.  Also on the positive side, we understand that the new lettings in the ‘Big Save Furniture Store' redevelopment (formerly British American Tobacco) in Ahuriri are at robust levels of rental and we have evidence of reviews of rentals to existing tenants showing increases of between 7% and 10% over the last two year period.  Similarly with sales, the number of new lettings on commercial and industrial space has considerably reduced from numbers experienced two or three years ago, and it could well be another few months before a definite pattern emerges as to where the level of new lettings on commercial and industrial space will settle. 

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

+ Mike Penrose + Trevor Kitchin + Max Plested + Derek Devane + Andrew Chambers + Hugh Peterson + Kayan Ho + Mark Apperley