TelferYoung (Hawkes Bay) Limited

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Hawkes Bay Newsletter - August 2010

10 August 2010

Welcome to the TelferYoung (Hawkes Bay) Limited August 2010 Newsletter

We are now well past the shortest day and it must stop raining soon!  The property market has reflected the cool and wet winter we have been experiencing, and though spring is just around the corner, we do not expect too much change in the market conditions.  The Reserve Bank has again lifted the OCR and though financial markets had factored this in, if retail interest rates lift, this will dampen any budding enthusiasm in property.

However as always, some localities and property types are doing better than others.  Building firms appear to have solid demand for well priced new homes in new subdivisions, and retail space in prime areas and more particularly Emerson Street has seen significant lifts in rental rates, as detailed in our Commercial section.

Though market activity is relatively low, the market is trading and in most sectors it has found its level.  The level of sales activity to some extent will depend on participants meeting that level.

DIRECTOR STEPS DOWN

Max Plested has been a Director at TelferYoung since its inception in 2000 and prior to that an owner partner in earlier trading entities. After this long involvement, Max is easing back and stepped down as a Director at the end of March, but continues to work fulltime as a Consultant.  Max remains fully involved servicing mainly the commercial and industrial sectors in Napier, Hastings and Gisborne.  Both clients and TelferYoung are pleased to be able to continue to draw on Max's expertise and experience in these sectors and are delighted he will remain part of the team for the foreseeable future.

BABY NEWS

As some of you are aware Kayan Ho, Valuer is currently on maternity leave.  Kayan works closely with Max Plested in the commercial field.  It is our pleasure to advise that Kayan is now the proud Mum to baby Sophie.  Mum and baby are both doing well.  Congratulations Kayan and Austin, terrific news.

NEW FACES AT TELFERYOUNG

There are some new faces at TelferYoung.  Susie Penrose, Mike's daughter joins us as a Graduate Valuer after completing her Bachelor of Business Studies majoring in Property Valuation and Management last year at Massey University.  Susie is working with Mike assisting mainly on a range of commercial and industrial assignments.

Erin Weber also joined the team as our Administration Assistant at the beginning of the year. Erin has returned home to Hawkes Bay from Auckland.  Erin is from Onga Onga and an ex Napier Girls High student.

Lastly Rachelle Wilkie is with us on a six month contract assisting in administration and also in the capacity of a Graduate Valuer.  Rachelle is covering for Kayan Ho who is currently on maternity leave. We also congratulate Rachelle on her recent engagement to Alistair Raw and wish them all the best for their future together.

RESIDENTIAL

In recent years there have been numerous statistical efforts to measure or record the residential property markets progress and performance.  A number of these measurements often have shortcomings. For example the average or median house price can be distorted simply due to a greater number of higher priced or lower priced houses selling in one period relative to another. This is easily exacerbated by lower sales volumes thus reducing the significance or robustness of these statistics. In addition, over longer periods of time the average house price can be over exaggerated given that the majority of houses added to the residential property stock (i.e. newly built homes) enter the statistics at a higher standard and hence higher value level thus raising and distorting the average price measure.  These variances can be further illustrated with residential properties that have undergone significant upgrading or extension work and subsequently sell. The sale price not only includes the original property but also the additional building work to the dwelling, further distorting the average price statistics.

We have used our extensive historical knowledge of the Hawkes Bay property market in an attempt to account for a number of these distortions and variances by effectively valuing an average house, in an average Napier suburb, on an annual basis.

Our analysis of value movement for a standard three bedroom house in our chosen suburb of Tamatea is as follows:-

As can be seen from this graph, the period from 2007 to 2010 is the only time in the last 30 years where we have seen a significant drop in residential property values.  This drop in the value of Napier residential properties is an interesting phenomenon as many participants in the property market have never had to deal with this before.

Vendors of residential property generally fall into two categories. Firstly there are the vendors who are not in a position where they have had to sell and they react by simply withdrawing their property from the market.  This accounts for the relatively low numbers of property transactions in the last three years. Secondly there are the vendors that have found themselves in a position where they have to sell and therefore have settled at a price less than what they would have expected in earlier years. 

Purchasers have also found themselves in two camps.  The first group of people, who would have been prospective purchasers in the 2008 to 2010 period have found themselves unable to purchase due to less flexible lending policies by financial providers, while other people with the capacity to purchase have looked to maximise their position in a buyer's market by waiting until either the perfect property emerges or alternatively the opportunity arises to take advantage of the more anxious vendor who needs to complete a sale.

For the remainder of 2010 we expect a continuation of this current property trend where we have a number of cautious purchasers waiting to take advantage of those sometimes anxious vendors.

HORTICULTURE

The horticultural property market has been very subdued in the last quarter.  There have only been two sales of any significance.  Two separate orchards sold as a going concern in the Tuki Tuki locality with productive land and trees equating to $65,730 per hectare, and an orchard in the Te Mata Mangateretere district sold in July with the productive land and trees equating to $93,500 per hectare.  The later sale has a high lifestyle value content with the Tuki Tuki sale considered to provide a more accurate reflection of the productive value for horticultural properties.

COMMERCIAL

Contrary to what would be expected in recessionary times, shop rental rates in Napier's main retail strip of Emerson Street have shown solid growth in recent years.  Supported by Australian retail chains expanding into Hawkes Bay, rental rates in upper Emerson Street have shown increases of over 70% since 2002.  New letting rental rates at around $700 per square metre occupancy cost have been recorded on the sunny or southern side of upper Emerson Street and slightly less on the shady or northern side.

As a result of the growth in rental rates in the preferred parts of Emerson Street, we have seen interest in the more popular blocks of Heretaunga Street West in Hastings where rental rates have been substantially lower (up to approximately $350 per square metre) which has attracted some tenancy movement from Napier to Hastings.

These rentals, for comparative purposes, have been standardised to a 15.24 metre depth for the sake of consistency.

Hawkes Bay retail rental rates compare with the following broad ranges sourced from other North Island provincial centres, summarised as follows:

We conclude that prime rentals in Napier are behind Palmerston North and Hamilton, near those of Tauranga and ahead of Rotorua and New Plymouth. Accordingly we have been experiencing a "catch up" relative to other comparable provincial centres, this led by "national retailers" and creating further pressure on local retailers in an already tight economic environment.

COMMERCIAL SALES DATA

Sales of interest that have occurred in recent times include:-

RURAL PASTORAL

The rural land market has continued to be adversely affected by tight liquidity and the lack of available finance generally for new propositions whether development or purchase.

With the ongoing credit restrictions, the effects of drought in some areas, and the relatively late improvement in drystock returns as international prices lifted and the dollar fell, the market for fattening and grazing units has remained relatively inactive over the past 12 months.  However it is significantly better than that which prevailed one year ago and the prospects for some improvement in demand and value levels going forward are reasonably positive.

Hawkes Bay has seen a modest number of sales. Values now broadly range from $350 to $400 per stock unit for outlying hill country through to smaller well located units around $900 to $1,000 per stock unit.

A sale of note in Central Hawkes Bay saw an attractive easy contoured block in Ashley Clinton sell in March for $3,900,000 or $929 per stock unit. The same property sold in June 2008 for $5,160,000, showing a 25% reduction in value.

There are now some early signs of additional confidence creeping into the market but we would expect any improvement in values to be modest and slow as the fundamental liquidity difficulties remain and which will take some time yet to overcome.

LEASEHOLD ISSUES

Leasehold property is again in the news as lessees struggle with what are seen as large rental increases. With 21 year reviews, increases will appear to be large, but for large periods of any review period, leases are often well below the market.  Very similar ground leases were altered in 1997 by legislation with the Maori Reserved Land Amendment Act.  This Act increased the review frequency from 21 years to 7 years to be fairer for the Maori land owners.

As a market, leasehold sales are compared against one another as to value relativity. At TelferYoung, we have often felt that within that leasehold sector, the sale prices have not reflected the actual value of the lessee's interest in the land value and prices have been overstated. In other words the differential between leasehold and freehold values has not been large enough to reflect the ongoing cost of the lease. However at present, there is significant negative sentiment to leasehold property and in some cases, the pricing of leasehold property appears very favourable.

TelferYoung act for lessors in setting ground rentals and free holding levels, but also act for many lessees and we understand the issues around leasehold property.

The biggest issues occur around rent review time. Lessees may buy a property when the rent is relatively low. This may be an affordable option until the lease is reviewed. Lessees need to be aware of the likely future costs of rent reviews when buying, and make some provision for when the increase in outgoings arrives. If there is no ability to meet that, perhaps the property is un-affordable.

In most cases, future rent increases can be predicted well ahead of the event.

When providing reports on leasehold property, TelferYoung provide an indication of the current ground rent if a review were to take place at the present time, thus better informing buyers of the future commitments they are signing up to when buying leasehold property.  The lease involves a contractual agreement between the lessor (land owner) and lessee (the one paying the rent).  The lease sets out the rules and procedures for future rent reviews.  It is a legal and binding document and buyers need to know what they are getting into when buying a leasehold property.

The issues are often complicated, but we are always happy to discuss them with interested parties, so the best decisions can be made. There are situations when leasehold property is a viable and sensible option, and being well informed will help prevent people buying into situations which ultimately are unaffordable.

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