Industry insiders discuss property: New Zealand’s 2020 property outlook

The residential market

 

Managing Director, Barfoot & Thompson

Peter Thompson

“Generally speaking, Auckland house prices do not fall very far during periods of economic turmoil.”

 

Auckland: a barometer for the property market

Auckland is home to nearly a third of the country’s population and produces close to 40% of New Zealand’s GDP. Its residential property market is therefore the one investors watch most closely, as it sets trends that other regions follow.

Auckland was New Zealand’s first residential market to experience price growth in the middle of the 80s of the 20th century, and the first to emerge from the rising-price cycle in the late 90s of the 20th century.

Early in 2020, Auckland’s market showed positive signs, with prices rising towards their previous record highs. Sales in January and February reached their highest levels in 4 to 5 years.

All signs suggested 2020 would be a year of growth in prices and sales. However, it remains unclear how extensively the global spread of coronavirus will affect Auckland’s residential market.

Given the time lag between property sales and contract signing, the impact on sales is not expected to appear in the data until late April, or even May.

Generally speaking, Auckland house prices do not fall very far during periods of economic turmoil. Past experience during the global financial crisis and the SARS outbreak suggests owners simply sit tight rather than sell below market value.

For prospective investors seeking to understand where New Zealand’s market is heading, Auckland is worth watching during and after the coronavirus pandemic. It has proved a trendsetter in the past and is likely to play that role again as the current uncertain economic outlook unfolds.

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Founder, James Law Realty Ltd

James law

“If the seven major events Auckland is due to host in 2021 go ahead successfully, people will begin to feel confident and hopeful about the economy.”

Owners may start selling off property in June or July

In March 2020, the coronavirus outbreak causing such widespread anxiety had yet to take hold in New Zealand.

Our company’s residential listings suddenly sold out, as many Chinese people returned to New Zealand to escape the outbreak.

The residential property market is particularly active in February, March and April, a pattern that has remained unchanged for decades.

There are many reasons. Overseas migrants generally arrive to settle in New Zealand around this time, while universities and schools also begin their academic year early in the year. The Lunar New Year holiday brings a sharp rise in tourist arrivals too;

locals also generally return to their normal working routines at the end of January. With the year’s plans taking shape, many choose this time to buy a home.

When buyers crowd into the market, their desire to purchase grows stronger, and they act out of concern that prices will rise further. These months therefore generally set new highs.

In May, June and July, the weather starts to cool and people’s spirits tend to dip. Most cannot be bothered going to open homes in the cold, and with confidence also lower, sales volumes generally decline during these months.

In the first half of 2020, the effects of coronavirus and the global sharemarket crash together triggered the largest worldwide economic crisis of this century so far.

Industries including hospitality, aviation, tourism, services, imports and exports, and agriculture have all experienced widespread redundancies or business closures.

During financial crises, Australian parent companies also generally withdraw funds from New Zealand banks to Australia, tightening funding in New Zealand further and potentially leaving many people unable to obtain loans.

Residential sales are therefore expected to cool rapidly in June and July. This may cause pockets of panic, prompting some owners to sell off their properties, with those needing a quick sale naturally accepting lower prices.

Media coverage will also focus on the worst and most frightening possibilities, making people feel the end of the world is approaching and affecting house prices.

If the outbreak starts coming under control in September and good news begins to spread, people will still need several months to regain their confidence before returning to property.

People will then begin speculating about what the following year will bring.

If the seven major events Auckland is due to host in 2021 go ahead successfully, people will begin to feel confident and hopeful about the economy. Around the end of this year, the property market should therefore begin to catch its breath and make a comeback.

 

Senior real estate agent, Bayleys

Sarah Liu (Liu Sihua)

“When everyone else is frightened and waiting on the sidelines, it may be the best time to enter the market.”

Investing cautiously amid uncertainty

The recovery in the property market early in the year inevitably raised the question: “Is the start of the next decade-long upswing approaching?” But the recent spread of coronavirus has severely affected the economic outlook in New Zealand and worldwide, leaving many uncertainties ahead.

The long-term outlook for property should, of course, remain positive: underlying demand for New Zealand housing persists, and a substantial gap between supply and demand remains.

People who need a home can buy if it meets their housing requirements and is affordable. Investors, however, need to do their homework carefully and invest cautiously given the combined effects of numerous uncertainties at both the macroeconomic and individual levels.

Investors should follow several principles when making rational decisions. First, whichever area they choose, the property should be centrally located within it, with convenient access to transport, shopping and schools;

second, understand your financial capacity, keep your debt-to-asset ratio under control and establish a cash budget consistent with the risks you can bear, so that your investment is relatively safe.

Third, choose the right time to enter the market. Everyone has a different tolerance for risk: greater risks bring greater returns, while lower risks bring lower returns. When everyone else is frightened and waiting on the sidelines, it may be the best time to enter the market.

 

Senior real estate agent, Ray White

Sean Ma

“Investment properties with special approval in Auckland will become an investment option attracting attention over the next few years.”

Will established Chinese neighbourhoods return to their 2016 peak?

Since Auckland’s property market opened for the year, house prices have risen noticeably across all established Chinese neighbourhoods and traditionally sought-after areas.

Properties at auctions held by various companies have sold for substantially more than last year. Meanwhile, the price brackets for different property types and the influence of layout on final sale prices have also become relatively pronounced.

Among areas with established Chinese communities, house prices in East Auckland, the North Shore, parts of West Auckland and central Auckland have risen noticeably, showing strong signs of returning to their 2016 peak. City apartment prices have already recovered steadily to 2016 levels.

In terms of layout, a 5-bedroom property with a separately accessed unit can sell for up to NZ$1,400,000, while properties with two or more separately accessed units can reach NZ$1,800,000.

Those considering investing in house building could review their designs to maximise potential profits. At present, 1,800,000 is a clear price ceiling for houses in the market. With banks tightening lending, it is difficult to secure an attractive loan-to-value ratio above this price.

For first homes, investment properties and affordable housing, 800,000 is the ceiling, with most sales settling around 700,000.

Coronavirus is also clearly affecting the whole world. Faced with these unavoidable wider circumstances, we should look to the history of substantial overseas capital inflows and migration following SARS in ’０３ to inform our analysis.

Overseas capital generally requires returns to meet certain standards, and only a limited number of Auckland residential properties currently meet overseas investors’ requirements.

Whether buyers are using property income to fund education or simply purchasing overseas property, this will make investment properties with special approval in Auckland an option attracting attention over the next few years. Alongside location, the price per square metre and return on investment should be calculated carefully.

 

Chairman, Rosedale Apartments Ltd

James Zhang (Zhang Chenggang)

“New Zealand is becoming the best place for overseas investors to allocate assets as a hedge.”

A gradual rise in 2020, building momentum for gains in 2021

BNZ forecasts suggest coronavirus could push New Zealand’s economy into a technical recession. It predicts a contraction in the first half of this year, with at least two quarters of negative growth, followed by a recovery and continued growth in the second half.

Kiwibank expects the Reserve Bank to cut the Official Cash Rate by 50 basis points on 25 March.

In the short term, Auckland’s currently buoyant property market is very likely to stall, slowing from the second quarter as a wait-and-see mood grows and investment confidence weakens.

If the recession is particularly severe or lasts too long, house prices could fall by varying amounts across different areas.

However, Auckland’s fundamental housing supply and demand balance has not changed, New Zealand mortgage rates continue to fall, and global investment markets have suffered a major shock. These factors are making New Zealand the best place for overseas investors to allocate assets as a hedge, while large numbers of permanent residents are increasingly keen to return;

New Zealand’s unpretentious, natural and inclusive culture and way of life are also attracting a new wave of investor migrants.

Taking into account the widespread wait-and-see sentiment the general election in the third quarter will bring to the property market, I believe Auckland’s market should rise gradually in 2020, with adjustments in some areas, building momentum for growth in 2021.

 

Founder of Relab.co.nz, former property information engineer at Auckland Council, and former Barfoot/Raywhite

property listings information engineer

Leon Hong (Black Sheep)

“Invest according to your own capacity to bear risk, and stay within your means.”

Second half: first-home supply remains tight

RELAB data shows that over the past six months, developers and land bankers accounted for more than 20% of property transactions, while first-home buyers and property investors accounted for more than 40%.

The coronavirus outbreak is expected to weaken confidence among buyers looking to upgrade in the second half of this year, while the supply of first homes will remain tight.

Based on the public housing purchase trends we track, acquisitions for public housing will reach a record high this year, again substantially reducing supply on the market.

With mortgage rates expected to fall, market demand will remain strong and will not be greatly affected by the outbreak. Developers and investors should invest according to their own capacity to bear risk and stay within their means.

When developing property, do as much homework as possible in advance. Understand the local population’s makeup and preferences, then work with designers to develop a product that meets market demand.

Where many developers are active in the same area, speed is always the foremost competitive advantage. Aim to bring properties to market as quickly as possible to meet demand where supply is short.

 

Haig Robinson Property Brokers

Real estate agent

Kurt Zhu

“Buy a property with a high rental yield; one that delivers a cash return is best.”

A new trend for 2020: townhouse development. First-home buyers remain the main force in the market. Smaller, moderately priced homes with convenient transport links will be highly sought-after in 2020.

Since last year, clients and friends involved in property development have shifted from building large standalone houses to townhouses.

Sales experience shows that townhouses sell much faster than standalone houses, greatly reducing the pressure of recovering invested funds.

New or relatively new smaller properties will also appeal to investors because they have low maintenance costs, are easy to manage and offer high returns.

When buying an investment property, try to choose a good area. These areas generally attract much better tenants, making management easier in future.

Tenants are also more likely to look after the property, with fewer instances of rent arrears.

Next, choose a relatively new property that is easy to maintain. The government has significantly increased its requirements for landlords, and an investment property in good condition will save its owner considerable expense and trouble in future.

Also, buy a property with a high rental yield; one that delivers a cash return is best. This reduces pressure while increasing income, helping you prepare to buy your next property.

 

Commercial property

Colliers International

Director of Research and Communications

Chris Dibble: “Although many opportunities will emerge over the coming months, not all will be strongly appealing. When leasing, developing or investing, the best approach is to focus on the underlying drivers of the property sector and property fundamentals.”

2020: a year full of investment opportunities

Much changed in the first quarter of 2020 following the coronavirus outbreak and the oil price war. There is good reason to believe further changes lie ahead.

Although forecasting is relatively difficult at this stage, we can be confident that the property sector will offer plenty of investment opportunities. Many will emerge over the coming months, but not all will be strongly appealing.

When leasing, developing or investing, the best approach is to focus on the underlying drivers of the property sector and property fundamentals.

One important driver in the property market, particularly in Auckland, is the imbalance between supply and demand.

This will persist, benefiting the residential sector over the longer term.

House prices began recovering towards the end of 2019. Combined with low interest rates, we expect this could drive a strong resurgence in demand for residential development land and apartment development activity;

this demand had cooled slightly from 2018 to early 2019. Whatever happens, price is a key factor in the success of any residential project.

Commercial offices and industrial buildings will continue to attract many prospective buyers. Low interest rates and limited stock available to buy will drive prices higher and further strengthen yields. However, closer attention to tenant covenants will be a key feature of the market.

Investors will also assess rental trends with a focus on strong cash flow, manageable debt and reliable income prospects.

For retail property, a cautious and pragmatic approach is essential when assessing any investment opportunity. The sector faces numerous challenges amid the recent economic and financial turmoil, and these difficulties may intensify in some industries and locations.

Retail investment opportunities are often a topic of discussion.

Good retail investment opportunities generally take the form of busy shopfronts, including those in shopping centres, usually in areas with substantial supporting amenities and selling goods and services that cannot be bought online.

Good retailers also need to offer an advanced, customer-focused shopping experience.

As opportunities of this kind are uncommon, competition will be intense. Prospective buyers will therefore need to invest quickly, carefully and confidently.

 

Director of Capital Markets, CBRE Auckland

James Lee

“Some properties sell cheaply, but future capital expenditure could be high.”

Demand for leased investment properties remains strong

In the second half of 2019, Auckland recorded 84 commercial property sales worth NZ$1,900,000,000, accounting for 78% of the national sales total. Of these, 7 transactions exceeded $50,000,000. Wellington recorded 14 transactions above $5,000,000, totalling $203,000,000. Christchurch recorded 13 sales totalling $340,000,000.

Overseas investors injected NZ$551,000,000 into New Zealand’s property market in the second half of 2019, and sold properties worth US$88,000,000.

The main overseas buyers came from Australia, China and Singapore. Over the past 5 years, Australians have been the most active participants in New Zealand’s commercial property market, purchasing more than NZ$2,100,000,000 and selling NZ$1,900,000,000 worth of property.

The median transaction price was NZ$11,000,000 in 2019, compared with NZ$10,000,000 in 2018 and NZ$10,700,000 in 2017.

After a brief decline in 2017, the annual average price rose somewhat in 2019, returning to the overall growth trend seen since 2008.

Current growth is mainly being driven by a recovery led by large institutions and several major syndicated transactions.

It may be too early to identify a renewed trend in median property prices. Given the current market structure, a more appropriate assumption is a price range of NZ$10,000,000 to NZ$12,000,000.

Overall, transaction volumes in the second half of 2019 exceeded those in the first half, and demand for leased investment properties remains strong. Large institutional and syndicated investment remains very strong, both overseas and locally.

Sales values increased in Auckland and Christchurch, while Wellington recorded a slight decline. Office property sales dominated the market.

Asia-Pacific investors dominated overseas buying, with strong net capital inflows. Institutions and syndicates led positive net investment activity, while financial institutions returned with strong momentum in net capital accumulation.

The number of new residential projects remains very low, with extremely limited choice in Auckland. Residential sales are starting to recover, attracting developers again.

Investors should carry out thorough due diligence, including assessing property values and market rental returns, securing a sound investment return and checking seismic ratings. Some properties sell cheaply, but future capital expenditure could be high.

 

 

Investment adviser, James Law Realty Ltd

Michael Chen

“This could increase commercial property owners’ annual returns by around 10–15%, providing a substantial boost to confidence in commercial property investment.”

Government support package could boost investment confidence

For the familiar reasons surrounding the pandemic, commercial property owners are worried about the economic environment. Falling business confidence and poor trading conditions for tenants will have many negative effects on their investments.

However, the government’s newly announced NZ$12,100,000,000 economic support package brings very significant good news for commercial property: from April 2020, owners of commercial and industrial properties will be able to claim annual depreciation of 2%, reducing their tax bills.

Thousands of commercial and industrial property owners will benefit by hundreds of thousands of New Zealand dollars from tax changes included in the government’s NZ$12,100,000,000 emergency stimulus package to address the effects of the coronavirus pandemic.

For example, a restaurant property worth NZ$2,000,000 comprises land valued at $600,000 (which cannot be depreciated), a building valued at $1,000,000, and fit-out and equipment worth $400,000.

At the end of the current 2019–2020 tax year, depreciation can be claimed only on the $400,000 of fit-out and equipment, at a rate of 10–12% depending on the nature of the fit-out, amounting to about $40,000.

But from April 2020, under the government’s announcement, owners can also claim annual depreciation of 2% on the $1,000,000 building. This adds another $20,000 a year, bringing the tax-deductible amount to around $60,000.

This could increase commercial property owners’ annual returns by around 10–15%, providing a substantial boost to confidence in commercial property investment.

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ABC Business Sales Limited

Business broker

Wella Wang

“Act when the time is right.”

2020: the pandemic will pass, and life will go on

The outbreak has made Chinese people reluctant to dine out, leaving many Chinese restaurant operators struggling badly. Few Chinese customers are visiting cafés either. Hospitality owners selling their businesses are taking a pragmatic commercial approach, with prices open to negotiation.

Other sectors, including motels, international education agencies, tourism, entertainment and beauty services, have also been affected to varying degrees. Business sale prices across these sectors are adjusting to market conditions.

A crisis means opportunity follows danger. The pandemic will pass and life will go on. Now is the time to buy a good business: purchasing one with potential at a low price is undoubtedly a wise move. Simply waiting will only mean paying more.

Act when the time is right. This is especially true for first-time buyers: owning a business brings cash flow, cash flow enables borrowing, and once a bank is willing to lend to you, move quickly to buy a home.

Whether buying a property or a business, however, be sure to use a professional to make the process efficient. Reliable professionals do this for a living: they assess properties and businesses every day, and their broad experience helps them understand what suits you.