TelferYoung (Waikato) Limited

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Waikato Newsletter - December 2009

21 December 2009

The New Year is fast approaching and it has been an interesting 12 months. The early part of 2009 showed an outlook which was more negative than positive, underpinned by an expected rise in unemployment throughout the year and an overall hesitancy in the market.

General

Some sectors of the economy have suffered more than others, and whilst we are still in an uncertain economic climate, the early part of 2010 should give us some indication of what to expect throughout the year. 

Market Commentary

Commercial and Industrial

We have seen an increase in market activity toward the latter part of 2009.  This has been seen particularly in regard to sales of investment property and residential sales.  Precipitating this market interest has been the fall in both fixed term interest rates and mortgage rates, together with the slight upward movement in property returns.  Indications are that interest rates for fixed and floating rates will increase toward middle of 2010. 

Good quality investment property subject to medium to long term lease commitment to respected tenants, are generally attracting returns between 7.50% and 8.25%.  Properties outside of these criteria, subject to shorter term lease commitment and local tenancies are in most instances falling between 8.00% and 9.25%.

The market for second tier property remains soft, with fewer enquiries for both leasing and sale.  Typically those properties which are vacant are requiring longer marketing periods in order to secure tenants.  As a result of this, it appears investors are taking into account the additional time and costs associated with leasing and the loss of rental and outgoings when completing transactions.  To a large extent, prospective owner occupier purchasers are not committing to property purchase at this time due to uncertainty in the general economy, thereby limiting the demand for these properties.

Traditionally there are few transactions in the commercial/industrial market just after Christmas and it will be interesting to follow the market attitude in the early part of 2010.  There is still an air of uncertainty, particularly in the retail and manufacturing sectors, as to how trading figures will emerge after the Christmas period.  Some landlords have been working with tenants who are in financial difficulty by reducing rental in the interim period until the economic climate improves.  We may yet see a continuation of this next year. 

Variation 21

In September 2009, the Hamilton City Council released proposed Variation 21 to the Proposed District Plan.  In essence, this alters the permitted uses of the Industrial and Commercial Service zonings, with the aim of reviving the CBD. The date for submissions closure has been extended until 1 February 2010 as a consequence of early response.

The Industrial Zoning change restricts office and retail activity to ancillary use only.  Effectively, this puts a halt to the office and box retail expansion, which has been occurring in the Te Rapa/Pukete area.

The Commercial Service zoning has been split into General Commercial Service and Central Commercial Service.  The aim of this is to retain flexibility for retailing and offices to the Central Commercial Service zone, which surrounds the City Centre, whilst reducing the continuing trend for office and retail expansion outside of the City Centre.

In regard to market activity, sales of note that have occurred recently include:

13 Maui Street (Beds R Us) sold at auction in December 2009 for $1,835,000. The property has a new six year lease in place reflecting a return of 7.96%.  It is also noted that Bed Post in the same development recently sold for $2,000,000 at a higher return of 8.50%.  This lease had four years left to run.
	16 Manchester Place sold with a twenty year lease in place, in November 2009 for $7,300,000.  The property incorporates a large amount of land and buildings reflecting a return on passing income of 8.31%.
369 Te Rapa Road sold in September 2009 for $6,750,000.  This is a large shopping development withthe anchor tenant being Spotlight.  There were multiple tenancies and on the passing income sold at 8.88%.

Residential

The rating valuations for Hamilton as at September 2009 have just been completed.  This is done every three years for rating purposes for the local authority and they are not always reflective of the market value at the given time.  Rating valuations are a mass appraisal assessment based on market trends with adjustments to value made to entire suburbs.  The properties are not always inspected and in some instances, they would not have been inspected in decades.  The rating valuations are exclusive of chattels, and do not take into account any un-consented refurbishment or redecorations.

Analysis of specific sales in September among various suburbs in Hamilton indicates the following variance between rating valuation and actual sale price. 

Whilst the assessments are sufficient for rating purposes, we would recommend that they are not relied upon when completing property transactions.  Objections have not been dealt with as yet as the closing period for objections is 8 January 2010. 

Should you wish to seek advice, please do not hesitate to contact us. 

Rural Residential

Sales of Waikato rural lifestyle properties have steadied following a slow start to 2009, with overall sales volume being 9% up on 2008, but 33% down on the preceding five years.  There is generally a lag between a change in sales volume and a change in sales prices and in this case the REINZ median sales prices in 2008 were similar to 2007, but have fallen by 6% over 2009.

The supply of vacant rural lifestyle sections is being slowly absorbed, with few new sections being created.  Sales are occurring where the vendors of existing sections have been prepared to meet the market.  We see supply and demand for vacant land coming into balance in most areas in the near future.

Those building a new lifestyle house, then wanting to move on are often finding that they cannot sell for the cost incurred, especially at the high quality/high cost end of the market.  There is a noticeable decrease in sales volume over $700,000 as there are fewer potential buyers and those with more money often wish to have a house built to their own design, limiting the on-sales market at the high end.

Rural

Demand for grazing land is presently very restricted and most market activity has currently been for dairy farms. At recent Bayleys auctions most properties have received bids; however, it appears that both vendors and purchasers are holding their ground making it difficult to conclude a sale. 

The current market situation reflects:

1. the restricted number of purchasers either in a cash position or who have credit facilities to purchase,
2. the volatility of dairy commodity prices and 
3. the good selection of property available allowing for considerable indecisiveness to conclude a sale.

Fonterra recently announced their new Capital Structure Transition Plan.  This allows shareholders to buy or surrender shares up to 120% of their recent or expected milk supply for 2009/2010 season.  The key dates for the transition period are 21 January 2010 for Fonterra Share Registry to receive the application form, with confirmation of the Interim Statement of Holding forwarded 29 January 2010.  Payment is $4.52 per share and this is due 1^st February 2010.

The distributable profit will now be paid not on production, but as a dividend on shares held for a complete season as at 31 May of any year.  Therefore shareholders expecting to exit the company at the end of the 2009/2010 season should not buy shares. If they do, they will be expected to hold them to 1 June 2011.  This will include shares acquired through the purchase of a dairy farm. Conversely a vendor with excess shares over supply that does not transfer all shares will have their retained shares surrendered.  The surrender proceeds paid in July 2011 and depending on the transfer date the vendor may not be entitled to any dividend for 2010/2011 season. 

The Share Structure Plan will assist the supplier by providing both a return on their investment in Fonterra, and by separating their business investment from their farm business.  For Fonterra, the plan not only increases available investment capital, but maintains a more consistent level of total share holding enabling the company to move forward over the next 4-5years.

TelferYoung (Waikato) Ltd thank you for all your continued support and we look forward to continuing our association throughout 2010.  We wish you all the best for the Christmas Period and for an enjoyable start to the New Year.

Back issues of the newsletter can be obtained from TelferYoung (Waikato) Ltd
ph 07 839 2030
Fax 07 839 2029
489 Anglesea Street,
Hamilton
www.telferyoung.com
email: waikato@telferyoung.com

+ Doug Saunders + Roger Gordon + Andrew Don + Bill Bailey + Rob Smithers + Richard Graham + Russel Flynn + Lloyd Stephenson