TelferYoung (Taranaki) Limited

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Taranaki Newsletter - December 09

2 December 2009

Commercial Property - Has the bubble burst or are we simply experiencing a reality check?

For an extended period of time, from 2001 to 2007, Taranaki has seen strong demand for both commercial and industrial property.  There have been a healthy number of sales, increases in values and rentals, new subdivisions and developments and a shift in location for various types of business.  These have been exciting times to experience and profitable ones for property owners, particularly if the assets were purchased early or prior to the boom. 

History tells us that property values run in cycles and following a period of increases there is usually a moderate readjustment followed by a period of relative stability.    With the length of the recent property boom, history looked like it might be rewritten. However, along came the recession and then the brakes began to be applied.  With strong dairying and petrochemical industries, the impact has been felt later in Taranaki than other parts of New Zealand, but as the graph below demonstrates it is with us now. 

So does this mean that the commercial real estate bubble has burst, or is it simply a reality check?  In our view it is the latter, being largely the start of a market correction.  There is still demand for quality investments as shown by these recent sales:

While the recession has had an obvious negative impact on economic confidence and has led to a decline in sale numbers, other factors also play a part.  For example:

• There is an absence of quality investment property currently being offered on the market.  Existing owners are reluctant to sell because of limited alternative investments that show comparable yields to risk profile.
• There appears to be a different expectation between vendors and purchasers as to an appropriate purchase price.  For second and third tier properties, yields need to increase to reflect the differences in quality of building, location and tenant viability.  That is, if good quality property shows yields of 8% to 9%, then second and third tier properties should be yielding 9.5% to 11%.  Based on existing flat rentals, the only way a potential investor can increase the yield is to pay less for the property. 
• In general lenders have reduced access to funds.  They also have a reduced risk appetite and we are seeing greater attention to standard investment fundamentals.  As an investor, not only is it now harder to borrow funds, but the percentage that a lender will advance on a property is also often reduced. Therefore the purchaser will need to use more of their own funds, i.e. have a higher equity in the investment property.

In the current property market investors should be fully informed and conversant with the raft of issues that impact on a property decision. This applies whether selling, buying or leasing. As the market is no longer in a strong growth phase there is no certainty of capital growth to cover mistakes made at time of purchase.

TelferYoung can provide independent professional advice to help maximise your property decisions. 

WALT

As a commercial property owner if you do not know what WALT stands for, then perhaps you should. 

WALT, or Weighted Average Lease Term, is one of the investment criteria that most lenders apply. Currently lenders appear to be putting more emphasis on this aspect of a commercial property loan application.  They want to know how long a lease has to run, if the property is multi tenanted and what is the weighted average term remaining of the combined leases. 

The strength of the tenant, the property's location, its age and the quality and nature of improvements all play a part in evaluating an investment, however all things being equal, lease terms then come into play.  A seven year lease with five years to run is going to be viewed more favourably than a seven year lease with two years to run.  Similarly, a new seven year lease would be considered better than one of three years with two rights of renewal of three years each.

Mortgages on commercial property tend to be relatively short term and sometimes fall due at inconvenient times. 

To achieve the desired win/win situation you are in a stronger position if your offer is supported by independent property advice. This will make it easier to show your tenant that the proposition is in their best interest. The team at TelferYoung are happy to meet with you and discuss the various options of achieving this.

Back issues of the newsletter can be obtained from TelferYoung (Taranaki) Ltd
143 Powderham Street,
P O Box 713,
New Plymouth,
New Zealand.
email: taranaki@telferyoung.com

+ Mike Myers + Ian Baker + Adam Boon + Fintan McGlinchey + Monique Burr + John Larmer