Balancing value and risk in the post-pandemic era

Global financial markets have been marked by change and volatility since last year.

The Covid-19 pandemic and potential geopolitical risks have cast a shadow over the global economic recovery. Financial markets, constrained by the economy, continue to face considerable uncertainty. The International Monetary Fund (IMF) Monetary and Capital Markets Department's director, Tobias Adrian, has written that growing uncertainty about the strength of the recovery is increasing investors' concerns about the economic outlook.

In highly uncertain markets, cognitive biases can easily push ordinary investors towards extremes: either pursuing only high-risk assets and taking on unnecessary risk, or investing only in low-risk assets and failing to meet their return targets. How should investors respond to market challenges in today's highly uncertain investment environment? How can they find a balance between value and risk in the post-pandemic era?

With these questions in mind, YIJU New Zealand conducted an exclusive interview with Onelend Capital executive director Bryan Tang:

 

YIJU: How would you assess New Zealand's current financial market?

Bryan：In New Zealand today, the official cash rate (OCR) continues to surge and has reached its highest level in nearly 6 years. Rising borrowing costs will undoubtedly have a direct impact on property investment, and property transaction volumes have fallen significantly in recent times. Building materials and labour remain in short supply, while construction and development projects will also face financing difficulties.

However, I must point out that all economic activity is cyclical. Looking back over the past 20 years, we experienced the market decline following the 2008 financial crisis and saw the housing market reach an interim peak in 2015. During this period, the OCR also reached a high of 8.25%. Over the past two years, low interest rates have helped New Zealand property prices rise by more than 25%, far outpacing gains in other developed countries.

However, with global stagflation and the end of the low-interest-rate era, I believe we have now left the earlier boom behind. House sales and mortgage applications have declined, and the steadily cooling market is braced for winter. Although the property market may decline in the short term, it should maintain a gradual upward trend over the long term. Reserve Bank of New Zealand economist Paul Conway also said at a recent financial conference: “We do not want house prices to keep soaring, but neither do we want them to crash suddenly.”

 

YIJU: What financial investment advice do you have in the current environment?

Bryan：One word: “steadiness”. This does not mean expecting everything to remain stable and unchanged. It means knowing when to advance and retreat amid uncertainty, and seeking a balance between value and risk. Recurring outbreaks of the pandemic have affected households' current income while further increasing investors' concerns about uncertain future income, delaying investment decisions. Of course, this also reflects most investors' instinctive aversion to risk.

Nobel laureate in economics Markowitz once said: “Diversification is the only free lunch in investing.” I believe that when market uncertainty is high, allocating some capital to tangible assets such as property is a good investment option, alongside bonds and shares suited to your risk tolerance. In any country, well-located, high-value property is always scarce and offers stability. However, uncertainty about the future housing market has left many investors waiting on the sidelines.

My advice is to let professionals handle specialist work when uncertainty is high, keeping risk to a minimum. Onelend's recent first-mortgage property fund investments have mainly focused on central Auckland or new development areas with clear prospects for population inflows, nearby employment and commercial centres, and good infrastructure. For investors who do not want to manage property investments themselves but still want the higher returns they can offer, Onelend's first-mortgage property fund will be a good choice.

YIJU: You mentioned areas with value. Auckland's recently introduced Medium Density Residential Standards, MDRS, have attracted considerable attention. Could you share your views?

Bryan：Before answering, we need to understand why the new policy was introduced. The government's ultimate aim is to ensure every New Zealander has safe, comfortable and affordable housing, and to balance urban and suburban land supply to accommodate population growth and movement between regions. Population growth is the main factor supporting New Zealand's property market, particularly in economically developed areas. But it is not the only factor: lower interest rates and a favourable tax system have also boosted the market over the past two years. In terms of supply and demand, extensive land-use restrictions, lengthy building approval processes, and construction delays caused by the pandemic and materials shortages have created a shortage of supply, pushing house prices even higher.

There are only two ways to address current inflation: increase supply or reduce demand. In the short term, we have already seen the market retreat as interest rates rise and the government tightens personal lending through the CCCFA (Credit Contracts and Consumer Financial Act). In the long term, however, increasing supply is also an urgent issue. As for demand, these problems did not develop overnight. Housing supply was already struggling to meet demand before the pandemic, even when New Zealand was experiencing a net population outflow. Although more local residents have left since the pandemic and household purchasing power has declined, the supply–demand gap will still take time to close over the longer term.

More efficient resource and building consent approvals, simpler site inspection procedures, a fast-track resource consent application process and the new Medium Density Residential Standards will all increase Auckland's housing supply. Of course, the government must also provide supporting resources and infrastructure if the legislation is to benefit more residents. Government plans also indicate the city's future expansion: areas undergoing urban renewal such as Mt. Roskill, Northcote, Glen Innes, Oranga, Mangere and Parnell; Silverdale, the North Shore's second sub-centre after Albany; and the new Drury development area in the south are all near-term directions for growth.

 

YIJU: What measures is Onelend taking as an investment and financing platform during the economic downturn? How does it differ from the bank where you previously worked?

Bryan：As an investment and financing platform holding the required financial licence, Onelend has a similar core business: lending. Lending is central to commercial banks and is their main source of profit and risk. One of the main differences between a good bank and a bad one is its ability to manage lending. We know that the 2008 subprime mortgage crisis arose because expanded credit was used to buy property, eventually overwhelming the financial system. In the current market, banks are tightening lending while demand for financing in the secondary market remains strong.

As a financial institution, we have recently received more loan applications, but our risk assessments for each application have also become more comprehensive and stringent. We require more rigorous stress testing to prepare for a range of possible future events. Our assessment priorities vary by product type. For land banking, for example, we focus on high-value areas and future planning; for construction and development, we examine building costs, materials supply and sales; for commercial property, we consider whether there are stable, long-term tenants and the industries in which they operate.

Of course, beyond the project itself, we pay particular attention to the applicant. Recent negative reports about mortgagee sales have involved problems with the projects themselves in some cases, but problems with applicants or their development teams in others. We often remind ourselves to assemble as much of the puzzle as possible so we can see the fuller picture, take a broader and longer-term view, and make better decisions.

YIJU: What do you think is the biggest difference between Onelend and other financial institutions?

Bryan：A human touch. Since its establishment in 2016, Onelend has developed steadily, and we are willing to do everything we can to help our clients achieve mutually beneficial outcomes. Darwin wrote in On the Origin of Species: “Ultimately, the species that survive in the market are neither the strongest nor the most intelligent, but those best able to respond to change.” This wave of market changes will indeed shake investor confidence and increase developers' financing costs. We recommend paying attention to the sustainability of project financing, pressure from maturing debt, and inventory and sales.

Onelend will get through this winter alongside you. Perhaps this is also an opportunity for everyone to pause and reconsider.