Residential vs Commercial – what you need to know to navigate New Zealand’s property market.
Phil Bennett General Manager of Property Finance at BNZ shares his insights into New Zealand’s hot property market. For those of you looking at coming home, he offers up his advice on how to navigate in the current environment.
Phil, give us an overview of New Zealand’s property market.
Much has already been written about New Zealand’s hot property market – both in Residential and Commercial, it had been going pretty strongly for a few years prior to Covid lockdowns in March 2020 and then effectively took off after that. We have seen the Government keen to slow residential price growth and introduce numerous policy changes to achieve this whilst at the same time reintroducing the ability to claim depreciation costs for commercial properties.
For me, things like appropriate gearing, interest cover ratios and amortisation of debt are key with interest rates and yields where they are. That said, globally interest rates are low and people are seeking yield – commercial property is still an attractive asset class but we also need to be conscious of changes in interest rates and yields, and how these will affect values and returns, which will vary from asset class.
It’s also important to consider the impact of global events on all these factors – leading to location, asset class, stability of the tenant and their ability to weather the storm or the attractiveness of the property around reletting.
What recommendations do you have for people wanting to get into commercial property and the housing market?
As a generalisation – Residential price growth seems to have stabilised the last couple of months as people come to grips with recent legislative changes. We haven’t seen residential investors flood the market with properties as they exit and switch to commercial, some investors and owner occupiers are sitting back and adopting a bit of a “wait and see approach.” At a recent launch of a townhouse project in Wellington 40/43 units sold on the night to a mix of investors, owner occupiers and first-time buyers, a lot of whom had Mum and Dad there helping out. Interest rates appear stable albeit there is always a view that they will go up mid to longer term.
For commercial I’d recommend sticking to the fundamentals – location, nature of the property (office /industrial etc) and supply/demand within those sectors, construction (NBS), current rentals to market and alternate uses of the property and is the property fit for purpose (i.e. an older industrial property may not have the floor loading and stud height to deal with current requirements).
Residential is similar – location, proximity to transport, schools and facilities, construction – water tightness and cladding etc. Plus the usual Freehold versus Leasehold and underlying ground rent, body corporate costs – any deferred or proposed maintenance issues and if you or the neighbour has a big section – what the local plan allows for in terms of height and ground coverage.
What trends are you seeing in the market?
In the Commercial market, we are seeing lots of talk about the office market and how this will be impacted by working from home. I personally think this is a short term trend rather than a long term systemic change to the market. That said we do need to see office’s being more attractive places to work – so what amenities are on offer – showers, bicycle parks, electric vehicle charging – we are even seeing facilities such as yoga and prayer rooms and sleep pods etc. Also, are they fitted out appropriately to deal with social distancing and more and more we are seeing tenants desire to meet various environmental standards around emissions and alike.
When it comes to suburban locations we are seeing some growth in this sector in respect to retail offerings – certainly during various stages of lockdown people were still looking for their caffeine fixes, local hospitality, retail, gyms and the like and we have seen these increase in popularity as an asset class.
In regards to tourism and hospitality, while our borders remain closed for significant tourists the view is this asset class will continue to be “watch” as we wait for longer term impacts on yields, values and revenue.
In terms of Residential, it’s about the rise of the Townhouse. We are seeing a lot of new entrants to the market looking to take advantage of the housing demand – people buying 2-4 residential properties and demolishing them to replace them with blocks of townhouses. Demand is high at the moment but the cautious banker in me notes it only takes some project delays, costs increase or settlement defaults to have some of these to end in tears. There’s also plenty of evidence around supply chain issues and I wonder how these will play out for smaller less experienced builders and developers as the major suppliers will prioritise their long term larger clients.
Any tips on how to navigate?
Cash is King – both in terms of initial gearing and ongoing cashflows. Property tends to be a long term asset – so get the gearing right and it provides the ability to not only weather the storm but also take advantage of market trends. Don’t hesitate to re-invest in your property.
To an extent – Love your tenant, they provide the cash flow, so making sure they are looked after, have good facilities and premises is crucial. We saw some very interesting tenant and landlord behaviours during lockdown – the best outcomes for all were when all parties engaged early and found common ground.
Don’t assume that the market will always go up – it wasn’t that long ago we experienced real peaks and troughs in respect to values and rentals– that said I do see more of a rolling hills scenario for the mid term.
Can you talk a bit about rates and terms?
I’m not a financial advisor so I can’t give any advice per say but if people are looking for help I would recommend they talk to one of our experts by following the link below.
What I can say is that I started banking back in the 80’s and these days interest rates are certainly at historic low’s – the 80’s saw lending rates >25%. Personally, when it comes to rates and terms I always like to know exactly what I’m up for and that way I can then adjust income and outgoings from there so I tend to favour a fixed rate for a medium term and then manage through rent reviews.