Hawkes Bay Newsletter - March 2011

INTRODUCTION

We discuss issues including the earthquake strengthening of buildings, EQC insurance and the present state of play in the residential, commercial and rural markets.

The catastrophic natural disasters that have occurred over the past six months in Christchurch and Japan coupled with the unrest in Libya present a rather bleak outlook to the overall economy.

However, the Reserve Bank has reduced the OCR by 50 basis points this month to 2.50% which has provided some relief to those who remain on variable rate mortgages and it is hoped to provide some much needed stimulus to the property market.

EARTHQUAKES AND NAPIER

The devastating effects of the Christchurch earthquake have most homeowners considering how they would be affected if an earthquake struck.  Damage in Christchurch was due to the structural movement or collapse of buildings, but also a significant amount from liquefaction. Liquefaction occurs when soft loose water logged soil is shaken violently, compressing the soil and forcing water to the surface resulting in a layer of mud.  Much of Hawkes Bay is situated on soft land prone to liquefaction, which should be taken into account when building new homes.  Raft floor or floating foundations is one method that could save new homes in Hawkes Bay from irreparable damage if an earthquake did strike. Raft floor construction has interlocking ribs connecting all edge beams and in between the ribs are solid polystyrene pods. The result is the foundation forms one structural element which will retain its shape even if half of the soil below the foundation moves.  This should alleviate the cracking of foundations that has been seen in many Christchurch homes.

Napier is well known for its Art Deco buildings but it is these buildings that are at risk if an earthquake does hit. As seen in the Christchurch earthquake many old brick buildings have collapsed or seen large amounts of damage.

Whilst Hawkes Bay does have higher buildings standards than other parts of New Zealand due to the higher chance of earthquakes, Gisborne and Christchurch have recently increased their level of compliance to the Building Code for older buildings to 67%. In Napier and Hastings it remains at 33%. This means that a building must be 33% compliant to today's buildings standards. There is now talk that Hawkes Bay will increase the required percentage to 67%. The resulting cost to building owners will have major implications and with the greater community good at stake, some form of outside assistance may be required. In Napier where a lot of tourist dollars rely on the heritage of Art Deco buildings, the cost of losing these buildings if an earthquake did strike could be far reaching.

In previous natural disasters around New Zealand, statistics show that approximately one third of people impacted are uninsured, a further third are underinsured and only one third are adequately covered. TelferYoung can provide insurance certificates to more accurately estimate the replacement cost of buildings to help ensure the insurance cover is appropriate

So how do you know if you are covered in the event of an earthquake?

Firstly it is important to note that EQC insurance only covers residential properties. EQC insurance cover is not a given, to be covered by EQC insurance you must hold a current fire insurance policy on the property with a private insurer. The private insurer will collect a premium on behalf of the EQC. EQC cover has a maximum claim amount of $100,000 plus GST for dwellings and up to $20,000 plus GST for personal effects. Private insurers will cover the amount beyond the EQC cover up to the limit of the cover you have on your house and contents policy.

EQC insurance will cover earthquakes, natural landslips, volcanic eruption, and hydrothermal activity, tsunami and fire caused by these disasters.  For residential property storms and floods are also covered.

RESIDENTIAL

In early 2011 the residential property market in Hawkes Bay proceeded at a slow pace with low numbers of transactions and no discernable overall movement in values across most price brackets.

Despite relatively low mortgage rates offered by financial institutions, few new house purchasers qualify for funding eligibility to purchase their first house and of those who do qualify, most are not in a hurry to commit to a purchase.

January sales volumes were extremely low and while February transactions were nearer the levels seen in recent months, market sentiment is subdued.

A feature of the residential property market of the last three years has been the significant increase in the number of mortgagee sales.  TelferYoung's research over 60 of these type of sales have occurred in the last three years.  Our analysis of these sales show that some have been purchased at similar levels to what they would have attracted under normal market conditions, however some have shown relatively large discounts to market value of up to 50%.

The typical discount is around 20% offering potential buyers a head start if they are prepared to take on the risk of buying at mortgagee sale.

HORTICULTURE

In the past quarter there have been no orchard sales of significance.  A number of smaller properties (4 to 6 hectares) have sold with these having a strong lifestyle influence. At present there are approximately ten mixed orchard properties being offered for sale with the asking prices typically being advertised as "price on application" or "offers".

The viticulture sector continues to be under pressure with the latest sales typically being properties sold under some duress. A substantial vineyard and winery on Maraekakaho Road, Ngatarawa, recently sold as a going concern. This property sold with a forced element for $10 million. Another recent sale involved a 16.8 hectare vineyard on SH50 at approximately 20% below the 2007 value.

On a positive note, it is being reported that wine stocks are starting to shrink, with a reduction of some 40 million bottles of wine, and that international sales and demand are increasing which may mean an increase in prices for wine in New Zealand. Wineries were advised to cut back production levels because of an oversupply. There now appears to be improved demand for New Zealand wine with growers producing in a more sustainable manner. Wineries cannot afford to keep selling wine at the current prices and these will have to rise eventually. This may take some time (12 to 18 months) however there appears to be some light at the end of the tunnel for those that have managed to trade through the past two to three years.

COMMERCIAL & INDUSTRIAL

With yield rates analysed from recent sales of top tier commercial property largely unaltered from yields experienced in Hawkes Bay in the 2003-2007 boom times, it appears a number of astute investors are still more at ease having funds in sound commercial property rather than other forms of investment.  Surprisingly low yields in the range of 6% - 8%, as has been experienced lately with top tier property, are not that far in excess of rates being offered on bank deposits or government bonds.  The prices being negotiated and yields analysed from these sales seem a positive reinforcement for the economy in the medium term as these investors prepare to take advantage of increased economic performance and the associated up swing in the property cycle. 

Otherwise, the market remains relatively unchanged, with continuing subdued demand for available vacant commercial and industrial space.

RURAL

The Hawkes Bay rural farming market continues to be defined by low sale volume.  There have 18 recorded sales in excess of 100 hectares in the last six month period from Central Hawkes Bay through to Wairoa.  However of these, there have been some relatively good recent sales of larger units. In particular Gwavas Station which sold at auction in February for $9.2 million, a relatively solid price for a large and iconic Hawkes Bay Station.  This represents a sale price in excess of $850.00 per stock unit dependent upon assessed carrying capacity, can only be regarded as a solid sale.

Also there was a sale of a dairy farm at Willowford.  This was a 536 hectare property with a 320 hectare milking platform of which 240 hectares was irrigated.  The 3 year dairy conversion is projecting 190,000 kilograms of milk solids for this season.  The sale is at an anticipated level, not reflecting any hype in the market as a result of strong levels of payout projected by Fonterra.

The general market activity continues to be restricted by a lack of liquidity and while there have been some reasonably 'good buys', the majority of properties that have sold have been at reasonably strong levels indicating values are generally holding.  This would be expected in view of the solid returns dairy, sheep and beef farmers are currently receiving.

 

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