TelferYoung (Taranaki) Limited
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Taranaki Newsletter - August 2007
15 August 2007
Commercial & Rural Commentary for Taranaki Market
STRONG TARANAKI COMMERCIAL MARKET
So What is Your Property Worth?
Current sales data indicates that the Taranaki commercial real estate market remains in a growth phase. Whereas two years ago yield rates for average quality investments were in the order of 8%-9.5%, the most recent sales of similar type properties generally fall between 6.5% and 8%. For some properties this represents an additional 20% growth over a two-year time frame. Recent examples include:
Property | Location | Yield |
| Bond & Bond | 32 Devon Street East | 8.00% |
| Chubbs | 119 St Aubyn Street | 6.77% |
| Dental Surgery | 361 Devon Street East | 6.30% |
While these sales are in New Plymouth, the South Taranaki market follows similar trends with only a nominal margin in yield rates to reflect the locality difference.The reason for this growth in value? There are a number of factors worth mentioning. Property values are triggered by:
- The cost of alternatives – the increase in both land values and building costs has an inflationary impact on existing properties.
- Rental rates – in general most types of commercial property have experienced increases in rentals which, when capitalised, lead to increases in value.
- Expected returns – competition for investment properties has led to a reduction of investor expectations as to a yield rate or return on investment and this increases property values.
- Interest rates – normally increases in interest rates have a negative impact on value. This hasn’t yet been obvious in the current boom cycle.
- Increase in personal wealth – escalating property values (including residential) have resulted in an increase in personal wealth and provide greater borrowing power and thus investment opportunity.
- Competitive investment – property is viewed as the safe long term option and would appear to be the first choice for a large group of investors. Recent well publicised difficulties faced by finance companies highlight the risks associated with investments linked to higher interest rates. In addition a percentage of investors still haven’t forgotten past lessons learnt from the sharemarket.
While each of the above factors can affect the value of commercial property, by far the biggest current driver of growth is demand. If the Taranaki market is a good indicator of the national scene, there are simply more buyers than properties available for sale. Locally the number of properties on the market isn’t large and keen competition is driving up prices. Returning to the question – “just what is your property worth”? Probably more than you realise. If you are considering disposing of any property or rationalising your portfolio, now is as good a time as any. Buying or selling, an informed decision is a better one.
RURAL COMMENTARY - THE TARANAKI MARKET
Whoever said “The only constant is further change” has proved to be right when it comes to the dairy industry. First, farmers at Okato are putting Fonterra’s chairman on the spot over continuing low payouts and the company’s perceived failure to deliver on merger benefits; then, within a short time, Fonterra is announcing an increase in the 2006/07 payout and a solid prediction of over 550c per kg for the season now getting underway. Since the announcement in May of this dramatic turnaround, world prices for dairy products have continued to soar, undented by an exchange rate that is hammering other exporters, including the sheep and beef sector. The cash drought that was being experienced by dairy farmers has therefore been transferred to their hill country cousins.
Predicting the Market
What effect is this turnaround likely to have on the rural land market? Despite media comments to the contrary, the Fonterra announcement of better times arrived too late to influence the 2006/07 dairy farm market. This was subdued on the whole, with many properties remaining unsold by season’s end. High nominal equities have masked an accumulating debt problem in the dairy sector and the wise response of many establishing farmers feeling the pinch would be to consolidate their financial positions and build in a cash buffer. But rural property markets do not always act rationally, while farmers are the ultimate optimists. There is therefore little doubt the confidence that was ebbing away in the dairy sector has been fully restored and the market going forward is likely to be bullish. The trend to amalgamate smaller dairy units into larger operations will continue and weaker economic units that are not easy to merge may change to dairy support use.
Sheep & Beef
Cashflow problems in the sheep and cattle sector will cause difficulties and, if the high NZ$ is a long term phenomenon, then there must be some concern about the viability of Taranaki’s eastern hill country.
The Urban Fringe
Urbanisation is having an increasing influence on New Zealand’s countryside. Rural land values close to centres of population have already risen well above levels where adequate return on capital can be achieved, even if intensive farming regimes are followed. Lifestyle blocks are fashionable throughout the country and this trend may continue while a high dollar rewards consumers at the expense of producers. However, there may be a major adjustment in this market as supply, due to flexible subdivision standards, outstrips a demand likely to falter if the national economy heads towards a “hard landing”.
Conclusion
In summary, the outlook in Taranaki is currently buoyant. The dairy cow reigns supreme and ongoing energy developments underpin the financial health of the region. But bearing in mind that change is constant, some caution is called for in the rural economy. Strong cashflows and cash profitability are required with less emphasis on capital gain. If the fundamentals of the farm business are sound then asset and equity growth are a given.
Back issues of the newsletter can be obtained from TelferYoung (Taranaki) Ltd
143 Powderham Street,
P O Box 713,
New Plymouth,
New Zealand.
email: telferyoung@taranaki.telferyoung.com
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+ John Larmer + Mike Myers + Ian Baker + Mike Drew + Adam Boon + Dave Luxton
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.