David Whitburn

Archive for February, 2011

A devastating earthquake hit the city of Christchurch in the South Island of New Zealand at 12:51pm this afternoon.  Prime Minister John Key announced tonight that “at least 65 people have lost their lives” and noted rescuers were still scrabbling through the ruins of collapsed buildings looking for injured and trapped survivors – and bodies.  The city is locked down and only the air force can fly over Christchurch.

CLICK for YouTube Video from TVNZ on the Earthquake: TVNZ: The Devastating 22 February 2011 Christchurch Earthquake

Bob Parker’s Mayoral Update

Christchurch Mayor Bob Parker stated that search and research teams are finding missing and trapped persons as we speak and that there will be an additional 250 people trained in search and rescue. He said that the Government has promised and delivered a lot of help.  Mayor Parker also said that residents should not flush toilets, collect rain water using pots and pans from the overnight rain expected as the city has had to shut off water.  With so many stormwater and sewer (wastewater) lines cracked, as well as mains cables, telephone cables and roads, there are major infrastructural challenges that will again take many months to sort out.

Source: www.stuff.co.nz Collapsed building onto a bus

Thirty people are believed trapped in the Pyne Gould financial services building on Cambridge Terrace, with another five trapped in the Christchurch Press building.  Whilst in the suburbs chimneys and walls have again come down, liquefaction has been occurring, raw sewerage from broken lines mixing with water, power cuts, tree and power lines falling down.  It has been a day of sheer and utter carnage in Christchurch.  Look at how multi storey large buildings have simply collapsed in the Christchurch CBD.

Search and Rescue officials, who are working throughout the night, maintain their efforts are focused on rescue rather than recovery.  Australian Prime Minister Julia Gillard has sent her condolences and promised support and has already dispatched a specialist search and rescue squad to assist us.

The spire in Christchurch Cathedral in the heart of the city came down and the rest of this historic church was badly damaged in the earthquake, and two people in there are also missing presumed dead.  Sadly the death toll of 65 is likely to rise.  This earthquake at 6.3 on the Richter Scale was extremely shallow at only 5 kms deep, meaning its intensity was so much more than the 7.1 magnitude quake on 4 September 2010, which was 10 kilometres deep. People were knocked to their feet, cyclists thrown off their bikes, and it was very difficult to drive in.

There is a long list of inner city buildings badly damaged:

Christchurch Cathedral, Copthorne Hotel, Provincial Chambers, Pyne Gould Guiness Building, Forsyth Barr Building, Press Building, Canterbury TV Building, Christchurch Star Building, Christ’s College in Hagley Park (Rolleston Avenue), Piko Wholefoods, Arts Centre.

There have been triage centres set up at Latimer Sqaure, Central City; Spotlight Mall, Sydenham; and Sanitarium, Papanui.

Further bad news is that it is not connected to the same faultline as the massive 7.1 (all references are to the Richter Scale) earthquake hit of 4 September 2010.  As a result it will have its own aftershock sequence.  Already Christchurch has had over 50 aftershocks, including one at a very significant 5.7 magnitude.  I know family and friends down there have had more than enough.  This will result in people leaving Christchurch as there will be more aftershocks to contend with and more sleepless nights.  The devastation is worst with loss of life, but this will have a huge financial impact on people in Christchurch, particularly those without insurance or under-insuring, and it sure will put the acid on a Government (that’s all of us) already in trouble borrowing over $300 million per week in terms of benefits for soon to be unemployed workers, fixing infrastructure, rebuilding etc.  Speculation of a Sovereign credit downgrade on account of this is too keen though.

The volume of house sales is very slow and this has characterised the last 3 downturns.  I have been to 6 auctions and looked at over 30 properties this week which in itself is not very interesting and is particularly normal for me.  However what I am surprised about is the level of enthusiasm from some auctioneers and real estate agents in the past week, who tell me that the market is about to boom with the Rugby World Cup on and all this immigration. On looking at the statistics and being in the market I have to introduce a small dose of reality, to inform that we are not going to see a boom in New Zealand anytime soon.  I don’t see it beginning in the next two years either.  The previous property cycles that I have studied have shown that in the downturn phase the volumes of sales are very slow.  Where are the Mitre10 dream home and DIY rescue style programmes?  Look at this in terms of the median line from the annual statistics are from REINZ as graphed above.  Clearly volumes drive values and with low volumes in 1998, 2000, 2008 and 2010 we saw negative equity years as regards property prices.

In my opinion we are technically in a double dip recession and this is more clearly seen if you back out the affects of inflation which is running high now with food price rises, petrol over $2/Litre at the pump again, tobacco and alcohol price rises, and of course the impact of the 2.5% GST rise.  Yet the nominal (inflation adjusted) house prices don’t get reported by Quotable or REINZ sadly.  Back out inflation and house prices are going down and are over 10% below their November 2007 peak.

Does that mean it is doom and gloom and you can’t make money out of property? No – I like my mentoring students and property investor friends are able to get great deals well below true value and in many cases with the ability to buy below value right now.  Recently my sister and soon to be brother-in-law bought their home in One Tree Hill around 10% below value.  There are investors selling thanks to tax changes, media doom and gloom headlines, fear and lack of understanding of the market and the property cycle.

Which market are you looking at?

So it is important to remember what market you are looking at.  Is it New Zealand?  Is it Auckland?  Is it Epsom, Remuera and Parnell near Auckland’s CBD?  Is it Papakura and Takanini?  Is it small Waikato and Bay of Plenty Towns?  Is is Christchurch houses within 5km of the CBD?  We have a number of sub-markets in New Zealand and some are feeling the pinch a lot more than others, and some (eg. the Epsom, Remuera and Parnell) are selling well in excess of CV and having massive rental rises and give the appearance of being in a more advanced phase of the cycle and in a recovery.  Yet friends with a house in Taupo haven’t been able to sell it for over 12 months and will sell it under CV…  Unfortunately statistics tend to generalise though, which is the same in stockmarkets, as some stocks are performing extremely well, and other are really struggling.

Auction strategy 4 (low opening and irregular bidding pattern)

I opened an Unlimited Potential (“UP”) auction up by bidding on a property being auctioned in Sandringham at $100,000.  That low initial bid in itself isn’t a crime! It is a little bit low on a property with CV of $440,000 and my tools and research indicating that houses within a 500 metre radius of it selling in the past 12 month at 12.62% above CV on average. However when he questioned the bid I followed up that with the supporting fact that it is a double dip recession.  I wasn’t trying to throw the auctioneer (Mark Sumich) off his stride, I wanted to outline the case for my bid to get him to accept it as I wanted that property to convert into a 3 bedroom under the same roof line to transform and add significant value to what wasn’t a fabulous renovation or layout.  I then used my auction strategy four of bidding assertively with irregular increments ranging from $200 (not accepted) so bumped up to $250 – $10,000, including some increments of $300, $1650 and $800.  On chatting to a UP agent he said my bidding pattern was irregular yet sophisticated and through off his buyer as they were not up with the play being pretty new to auctions.  Unfortunately I didn’t win this well located property as it exceeded my maximum bid, as I was up against two home-owner who don’t need to buy properties tens of thousands of dollars below true value.

At Barfoot and Thompson’s Chancery CBD HQ, the loquacious Marian Tolich stated “it always a good time to buy property” and then followed it up with a very emotional statement in “you can never pay too much for a good property” while engaging both a middle eastern looking and chinese buyer for a nicely done up 3 bedroom home in Epsom (so it obviously has the extremely coveted Auckland Boys Grammar and Epsom Girls Grammar dual zones).  The battle of egos ensued and the price paid was nearly $100,000 higher than the Vendor’s reserve (when it was “on the market”) and if my memory serves me right over $250,000 over CV.  The Epsom Vendors did very well indeed.  Yet other properties in the suburbs further out from the CBD had far less attention and didn’t meet vendor’s reserve, necessitating lots of offer crunching to make a deal happen.

REINZ House Price Index

Just a quick one to respond to two reader’s emails after my Quarterly Market Update seminar on Tuesday – here’s a statistic from REINZ mentoring students of mine have asked about.  It is the REINZ House Price Index.  I like REINZ and their work and the many fantastic agents we have in NZ, but I don’t rate this index as highly as the Quotable Value Quarterly House Price Index and nor does the Dr John McDermott (former Chief Economist of National Bank and a current Deputy Governor of the Reserve Bank).  Yes the market was low in January 2009 and that shows well, but it doesn’t show the 2010 mini dip very well at all, whereas the QV one does.

The take home message is that the market is a confusingly large one and there are many sub-markets.  Rents are skyrocketing in inner suburbs and eastern beaches (Kohi, Mission Bay etc) of Auckland and well located areas of the North Shore (eg. eastern beach suburbs) – more on that later.  There are opportunities in this market.  Ensure you buy below value and renovate to add value.

Property Masterclass

If you want to know more on how you can do this come along to Property Masterclass on Saturday 19th and Sunday 20th of March.  I will be presenting for 2 days on relevant market conditions, strategies and techniques to succeed in this environment, as well as covering off property investment basics for those contemplating investing.  Hope to see you there!

Changes to Qualifying Company rules and Look-Through Companies

Here is an important blog sourced from Inland Revenue in relation to the tax changes for LAQC owners.  The changes take effect from 1 April 2011.  Legislation passed in December 2010 made important changes to the rules for qualifying companies (“QCs”) and loss attributing qualifying companies (“LAQCs”).  These changes mean that LAQCs will no longer be able to attribute losses to shareholders.  The changes will affect all existing QCs and LAQCs, and also closed companies that may have wished to elect to use the qualifying company rules for income years starting on or after 1 April 2011. These changes also include the creation of a new tax entity known as a look-through company (“LTC”) to provide for a transparent form of tax treatment. This is to ensure that income and expenses are shared according to the owner’s effective interest in the LTC.

QCs and LAQCs (or their agents) will receive a letter late February advising them of the changes. Election forms and a factsheet will also be available in late February. A guide about look-through companies will be available in April.

Changes to the QC and LAQC rules

• The introduction of a new look-through company (LTC) tax entity for closely-held companies.
• Existing QCs and LAQCs will be able to transition into a LTC, or change to another business entity (such as a limited partnership or sole tradership) without a tax cost.
• Existing QCs and LAQCs will be able to continue to use the current QC rules without the ability to attribute losses.

The new look-through company rules

• The new rules create a new tax entity, called a look-through company (LTC).
• The new rules mean that the owners of a LTC will pay tax on the company’s profit and use the losses, subject to limitations.
• This is different from the existing LAQC rules because it is the owners of a LTC who will be taxed on the income of the company.
• A LTC’s income, expenses, tax credits, rebates, gains and losses are passed on to its owners, in accordance with their effective interest in the company.
• Shareholders of QCs and LAQCs will be able to elect to become an LTC.

A look-through company is still a company

• A LTC retains its identity as a registered company.
• A LTC will keep its corporate obligations and benefits under general company law, such as limited liability.
• The look-through treatment applies for income tax purposes only; the owners of an LTC are regarded as holding the LTC’s assets directly and carrying on the activities of the LTC personally.

Loss limitation for look-through company owners

• The LTC rules also have a loss-limitation rule, similar to that of limited partnerships.
• This will mean that owners can offset tax losses only to the extent that their losses reflect their economic loss.
• Any losses an owner cannot use are carried forward and may be used by the shareholder in later years.

Here’s what’s happening to current QC and LAQC rules

• The ability for LAQCs to attribute losses has been removed; this effectively means the LAQC rules have been abolished
• Existing LAQCs will default to QCs which may continue using the current QC rules.
• The current QC rules will remain while the Government reviews the tax rules for dividends, with a view to simplifying them for closely held companies.

Your options if you have an existing QC or LAQC

You have several options to choose from 1 April 2011. For instance, you can, without a tax cost:

• do nothing and continue as a qualifying company without the ability to attribute losses (the default option), or
• be taxed as an ordinary company by revoking your LAQC election, or
• elect to become a look-through company, or
• use the new transition rules to become a limited partnership, an ordinary partnership or a sole tradership. You will need to restructure your business and either make the company non-active or wind it up if you choose this option.

The new rules come into effect on 1 April 2011

• The legislation for these new rules was passed in December 2010 and comes into effect from 1 April 2011.
• The LTC regime will come into effect from 1 April 2011.
• LAQCs will no longer be able to attribute losses from the income year starting on or after 1 April 2011.
• The transition to a new entity can take place in either one of the first two income years starting on or after 1 April 2011
• QCs and LAQCs have six months from the start of their transitional year to advise us of their transition. The tax treatment for the entity they transition into (ie, LTC, partnership, or sole tradership) will then apply from the start of the transitional year.
• Provided the election to become a LTC or notification to become another entity is made within the first six months of the income year, the transition will be deemed to take effect from the start of the income year and will incur no tax cost.

Time to make an election

Elections must be received by the Commissioner before the start of the income year they apply to.  However, for the next two income years (starting from 1 April 2011 to 31 March 2013), existing QCs and LAQCs have a six-month extension period to elect to transition into a LTC, eg by 30 September 2011 if you have a standard balance date.  The LTC (look-through treatment) will apply from the start of the transitional year.

With acknowledgements to Inland Revenue