ValGroup Bulletin

In this issue:

Autumn 2009

Property: The Certain Investment for Uncertain Times
Dunedin & Environs - Market Report
Bay of Plenty - Market Report
New Zealand Property Commentary

Property: the certain investment for uncertain times

The media continues to be full of economic doom and gloom, but in one industry sector opportunities abound.

With interest rates at the lowest levels in many years and demand for property stalled, now is the perfect time to be investing in property, say experts. But there are conditions.

First, the window of opportunity is small. Tony Alexander of the BNZ predicts the cash rate will bottom out at 2% in the middle of the year. That means interest rate rises from the second half so low mortgage rates will have to be locked in quickly.

Second, property investment is not a fast money-spinner. Investors going into property need to be in it for the long haul, says Bruce Ranga, director of Investments Direct NZ Ltd.

President of the New Zealand Property Investors Federation, Martin Evans, agrees. New Zealand is the best place in the world right now to invest in property, he says. "The factors are good for buying investment property for the long term. There are not so many first home buyers in the market because of the banks' higher deposit requirements. Rents went up 7% in the 12 months to April 2008 but haven't risen since. I expect they will go up this year though."

Evans says that with fewer building consents being issued, fewer houses are being built, elevating demand. Plus, with declining overseas markets, it is possible that New Zealanders living overseas will return home. If they do, and they buy houses, demand will rise again. The same is true, he says, of immigration which is also likely to see an influx as people view New Zealand as a great place to live.

However, rushing into lengthy fixed interest mortgages may not be advisable just yet. Tony Alexander says, "With the further downside risk for all wholesale interest rates and therefore mortgage interest rates, the time does not yet seem at hand for homeowners to shift from floating or fixing six months out to longer term rates. That point is probably going to be reached before the middle of the year."

Those who invest in property do so because it offers many benefits over other investment types like shares or fixed interest.

Control is one benefit. Shares are at the mercy of the company being invested in, so if the company goes under, the investment is lost. Property, on the other hand, remains under the control of the owner who can choose when to buy or sell and, to a great degree, the level of return.

Another advantage of property over other types of investments is incentives.

Interest on mortgage payments is tax deductible and losses can be offset against other income.

Bruce Ranga says, "One of the advantages of property as an investment vehicle is the tax benefits which are not available on fixed investments. Interest on loans is tax deductible as are the operating costs of the property. It also allows tax benefits to be received as money is earned instead of having to wait for the end of the financial year."

Another incentive is depreciation. Ranga says the IRD has a list of depreciation rates that are applicable to property investment.

Mike Elford, the national president of the Real Estate Institute of New Zealand, says property outperforms other investments. "There is a swing away from equities and fixed interest investments because the returns are now so low. They have been around 7-8% in real terms, but now they are down to 3-4% and may still go lower before the bottom of the economic cycle is reached."

Elford says people are moving back to the property market for better yields on their money.

"We are already seeing large numbers of people coming back to the commercial market and we hear that around the country there is more investment interest now than in the past few months."

Bruce Ranga says one reason that the cash rate is still coming down is because the money which was being invested with finance companies is now going to the banks. "But people want a return on their investment which they're not getting from banks, consequently people are looking at buying businesses and properties."

Despite the opportunities presented by the current market, real estate sales volumes remain low, down 40-50% on the last three years, but prices have stabilised in recent months. However, there is some indication that people are starting to buy again.

Elford says several factors are currently affecting the market: unprecedentedly low interest rates, the tax relief coming on April 1, and a Reserve Bank committed to getting the economy back on its feet again.

Bruce Ranga names another factor affecting the market: the almost complete cessation of building development which means the quantity of new housing stock available is not increasing. However, demand continues to rise, especially in Auckland where the population is increasing due to migration, both internal and external.

"The key is to get into the market, to take some action. Most Kiwis are prone to procrastination, and don't take too many big risks. Long-term investments like property work for people if they hold their nerve."

But be warned, interest rates will go back up again, to around the 12% mark in four to five years, predicts Martin Evans. So be prepared for that when considering your investment alternatives.