Archive for March, 2011

Me in yesterday's Herald Homes, Ask an Expert section

I was asked by the NZ Herald to assist as a property investment expert in the Herald Homes supplement this week.  The question was:

With interest rates so low at the moment, we are considering buying a couple of units in Auckland as an investment. Is now a good time to enter the market?  What sort of returns should we be looking for?

I think that it is a good time to enter the Auckland property market right now.  This is because the property market moves in cycles and we are well in the downturn phase of this cycle.  Properties can be purchased below true value with good cashflow.  I am a passionate believer in buying for cashflow, equity and growth.

The returns that an investor can expect do differ widely, including upon which market you are looking at.  In my property coaching business NZ Wealth Mentor, one of the things I teach my clients is the importance of cashflow. This is because interest rates are at emergency low levels so you need to have a buffer for when they rise.  In terms of the various submarkets in Auckland, there are a number of very high-yielding inner-city freehold apartments.  Whilst the cashflow is very high I don’t foresee the capital growth to be spectacular.  If you are looking for positive cashflow there is an abundance of this in South Auckland, and a number of positive cashflow properties in West Auckland, as well as parts of Central Auckland. David Whitburn

Source: New Zealand Herald, Herald Homes supplement 30 March 2011.  Ask an Expert – David Whitburn

What a fantastic cricket match yesterday where the Black Caps defied most predictions and beat South Africa comprehensively.  There was a majestic performance by Jessie Ryder who set up a defendable total for New Zealand (of 221) by scoring 83 valuable runs, with fine assistance from Ross Taylor.  Kane Williamson coming in at 6 also contributed nicely with 38 off 41 balls too.  Then the bowlers after dismissing the brilliant Hashim Amla cheaply, were struggling with Smith and Kallis taking their run chase to 69/1 in the 15th over, and after Smith’s dismissal South Africa then got to 108/2 in the 25th over before they collapsed.  Firstly all-time great Jacques Kallis hooked a short pitched delivery from Tim Southee but didn’t get enough of it to go for six.  Jacob Oram ran like a gazelle and reached up using his 6ft6in tall frame to take a magnificent catch.  JP Duminy then missed a straight one from Nathan McCullum and just two balls later South Africa were in a deep hole never to get out.  AB de Villiers was run out by arguably the world’s leading fielder Martin Guptill, to leave South Africa at 121 for 5 wickets down (including all of their best batsmen).  What immediately followed was some more mental disintegration tactics that South Africa don’t cope well with:

Source: AP. The Blackcaps congratulating Faf du Plessis on his assistance in running out star batsman AB De Villiers

Kyle Mills wearing the red bib was injured so didn’t get selected but in delivering skipper Daniel Vettori a drink of water, he gave du Plessis a serving resulting in a fine of 120% of his match fee, and du Plessis got 50% of his match fee fined for pushing Mills shortly after this photo was taken.  Vettori got fined for a breach of the players’ code of conduct rules too.  Botha, Peterson, Steyn, du Plessis and Morkel were dismissed soon enough, leaving South Africa beaten by 49 runs with a total of only 172.

New Zealand now get to play Sri Lanka who annihilated England by 10 wickets with just over 10 overs to spare overnight.  This will be a tougher game against an opposition we don’t have a history of beating in world cups.  It is played on home territory for Sri Lanka at R Premadasa Stadium in Colombo, starting at 10pm NZ time on Tuesday March 29th – live on Sky Sports.

I was slightly surprised to find out yesterday that Don Ha Real Estate Limited which had the Ray White Manukau franchise has been placed into receivership.  This is interesting as it had been built up recently to be one of South Auckland’s leading offices.

Don Ha Real Estate Limited (Ray White Manukau) has been placed into receivership

Don Ha Real Estate in receivership

The National Business Review published this article which stated that “Don Ha Real Estate, a Ray White Group franchise, has been placed in receivership.” The article then went on to talk about Ray White’s involvement as franchisor who have at the request of the receiver Grant Thornton, taken over the day-to-day management of the business.  The NBR reported:

The extent of the company’s financial woes will be revealed on May 20 in the first receiver’s report.

Ray White chief executive Carey Smith said receivers Grant Thornton had requested, and would receive, Ray White’s support in the receivership process.

“Grant Thornton now controls every aspect of Don Ha Real Estate, including the management of the rent roll, the sales division, financial income and expenditure, and the compliance of the agency. We have met with the receiver, consulted our legal advisers and assessed the broader implications of the receivership action. We have reached an agreement with the receiver that we will fully support the process,” Mr Smith said.

“Ray White will be involved in the day-to-day management and operation of Don Ha Real Estate, with the intention of putting the business into a position where the assets and goodwill can be sold to a third party.”

In October 2009 Mr Ha managed to avoid the liquidation of his company DH Homes Trustees by settling with the party which brought the application against it.

Wide Media Coverage

This article was also covered in the Weekend Herald today.  Fairfax’s large website stuff.co.nz reported today that Don Ha Real Estate Limited was in receivership with Ray White taking over the management.  They covered Don’s very interesting personal story:

Ha came to New Zealand in 1980 on a refugee boat from Vietnam.

His first business venture was in 1983 when as a 12-year-old when he sold watercress to a supermarket. He began selling belts and shoes imported from Asia and later became an Amway salesman. In his first year in real estate in 1994, he sold 86 houses, the newspaper reported.

Many full-time property investors and internet reports like Shark Patrol have reported that there had been questions in the market from mid last year onwards raised by clients in relation to Don Ha’s construction company DH Homes Limited, which averted liquidation late last year.  Many tradespeople had been owed a lot of money for a long time, and complained about DH Homes Ltd cutting their bills.  Maria Slade in the NZ Herald reported that the out-of-pocket contractors joined forces and went to a debt collector. “After a bit of to-ing and fro-ing, we got half the money on the terms that we shut up, went away and left him alone. If we went for more, he [Don Ha] wasn’t going to give us anything, he’d basically liquidate.”

Don Ha's Facebook Page

Don Ha’s Side of the Story

Here is Don Ha’s Media Statement issued today in relation to the Don Ha Real Estate Limited receivership news that has been widely circulated in mainstream media and is the talk of property investment circles today:

Don Ha APIA Event – South Auckland group 23 March 2011

The Board of the Auckland Property Investors’ Association (Incorporated) have decided to remove Don Ha who was scheduled to speak at the South Auckland group on Wednesday 23 March 2011 in light of the above situation.  A replacement speaker has been sourced by APIA which is Levani Lum-On, and the venue has been changed from the Ray White Manukau Office to 294 Massey Road, Mangere, Auckland.

I appeared live on Close Up on TV1 on Wednesday in response to the “rental crisis” hitting Auckland. I let the host Mark Sainsbury know that this is in response to the supply and demand equilibrium, and that it is the inner suburbs of Auckland like Herne Bay, St Marys Bay, Ponsonby and Parnell that are the most effected, and in the Green Room before hand that rents are rising steadily but at lower levels elsewhere in Auckland too.

David Whitburn and Mark Sainsbury live on TVNZ's Close Up on 9 March 2011

David Whitburn on Close Up

It was an interesting experience and I felt comfortable with Mark’s knowledgeable questions and his producer’s professionalism as they screened me at lunchtime and took me from reception to the makeup room (for a light powder). Then I went to the Green Room along the corridor from the live studio.  After watching the tearjerking first article of Michelle Rambaud who is terminally ill and got married in hospital in the Green Room, I was escorted to the live studio. Then it was showtime. I start 3 mins 36 seconds through it (so feel free to scroll through until then):

Where rents are heading?

Rents are heading upwards in Auckland, based on underlying demand and some restrictions on supply with us underbuilding.  Only 15,602 building consents were issued last year and we needed to see over 25,000 to just keep up with population growth, let alone cater for people moving up from Canterbury in light of the horrific earthquakes.  The councils charging what they do with the comparatively new development contributions and the illogical denial of minor dwellings or granny flats in the previous Auckland City boundaries (ie. Avondale and Blockhouse Bay to the West, Otahuhu to the South and Glendowie in the far east), as well as the difficulties in getting construction and in particular development project finance, have all contributed to this.  Also many people are happy being tenants as they can live in a nicer area with the costs and perceived inflexibility of home-ownership.

Last APIA rent review

At the last APIA meeting as MC I decided to do a rent review and around 15 members put their hands up with properties they have let. Not a single member had lowered their rents and many had raised them quite significantly. From talking to NZ Wealth Mentor clients as well as property managers in Auckland and around the country I know that all of them are looking to raise their rents and the 6 month lock out under the Residential Tenancies Act 1986 is one of the main things preventing this.

In South and West Auckland there are stories of over 10 different prospective tenants wanting to rent properties and it is not hard to get at least a $20/week rent increase currently. In areas like Mt Wellington and Onehunga investors are raising their rents $40/week and when tenants complain to check what the rents are they are putting up with it, or leaving and the investors are finding that they can get even higher rents when they try to put on a higher price on TradeMe rentals. The mini boom that I predicted for the end of this year, has begun early!

I subscribe to Statistics New Zealand’s relevant property, housing and financial information, and was not at all to see the value of all building consents down to $537 million, which is the lowest value for any month since February 2002.  Obviously monthly statistics are not reliable as the months either side could be big months.  However the simple fact that building consents are low is best shown with a graph of residential building consents (excluding apartments which are impacted heavily by another market driver – the availability of finance).

Source: BNZ. Residential Building Consents (excluding apartments) Jan 1997 - Dec 2010

We are said to need over 25,000 building consents per year, which is over 2,000 per month.  We are struggling with around half of the consents issued to what we need currently.  The trend is shown with information going back from 1997 to December 2010, with the navy blue line being the line to watch as it is more like a 3 month rolling average clearly showing the downturn in the property market which started in 2007 and we are still in it currently.

Going back to the statistics released a little earlier today, the value of residential building consents was $309 million – down 19% from January 2010 and the lowest value for any month since January 2002.  There will actually be a large number of new (but with more stringent engineering and geotechnical requirements) building consents in light of the 22 February 2011 Christchurch earthquake.  Hopefully this will be tagged out by Statistics NZ so I can share this with you in my future blogs.

In the wake of the devastating earthquake where it looks like around 240 New Zealanders and global citizens will have sadly been killed, and many more injured, there is going to be some financial damage too.  Costs are likely to come in at over $10 billion. Fortunately this doesn’t appear that it will be against New Zealand’s Sovereign Credit Rating, nor the big 4 Australian banks (Commonwealth Bank of Australia – owner of ASB, National Australia Bank – owner of BNZ, ANZ – owner of ANZ and National Bank, and Westpac).  This would have been disastrous for Cantabrian home-owners in negative equity situations as a result of the earthquake, and also for home-owners struggling in what looks like a double dip recession (certainly it appears this way when inflation is backed out of the equation too).  This blog acknowledges the devastation on the great people of Canterbury arising from this second massive and larger giant earthquake, but focuses in on the financial impacts for property investors which include:

1. Interest rate changes
2. Insurance premium increases
3. Government policy/tax changes

1) Interest rate changes

Looking at the latest home loan rates at http://www.mortgagerates.co.nz/ you will note that there have been price movements this afternoon.  ANZ and their sister bank National Bank were the first to cut rates reducing one-year rates by 50 basis points, 18-month rates have dropped by 26 points and its two and three-year rates have fallen by 16 and 11 points respectively.  This was followed by cuts to short and medium term interest rates by ASB and their boutique sister bank, Bank Direct, Westpac and TSB Bank. This earthquake is a game changer and all previous predictions are off.  Our GDP forecast for the year was 2.3% now it has been reduced to a tiny 0.3%.  The Canterbury region which Christchurch dominates is responsible for 15% of New Zealand’s GDP. It will struggle to be anywhere like as productive as it should be, and massive Government subsidies will be required. I now predict the OCR will be lowered by 0.50% on 10 March as an emergency measure to return it to its lowest point in 40 years.  This is what the market is predicting anyway, with the flow off into short and medium term interest rates.  Take a look at the following table:

Source: Interest.co.nz - Interest Rates at 1 March 2011

2) Insurance Costs

EQC Levies

Firstly I need to tidy up the misconception that after a natural disaster everyone is entitled to a payout from the Earthquake Commission (“EQC”).  This government body was set up under the Earthquake Commission Act 1993, to provide a natural disaster fund for homeowners and tenants who hold insurance.  The levies are 5 cents (plus GST) for every $100 insured, raised from landlord’s taking out building cover and tenant’s taking out contents cover.  The most you can pay a year for one dwelling and its contents is $67.50 including GST. This will give you the maximum cover of $100,000 (+ GST) for your home and $20,000 (+ GST) for personal belongings. EQC pays the value of  damaged land at the time of the earthquake or natural disaster, or the repair cost, whichever is lower.

Dwellings are covered on a replacement value basis. Personal property is insured on the same basis as the household insurance policy covering the same property.  Some retaining walls are covered, but on an indemnity basis.

Clearly this is going to be a massive claim on the EQC and although costs have not been calculated with claims deadlines for aftershocks to the 4 September 2010 not being closed yet.  It may well be the the EQC war chest is emptied and that the Government needs to borrow funds to top it up.  Going forwards EQC levies are likely to triple and you need to budget for this cost increase.

Insurance Premiums

Private insurers and their re-insurers are going to get hit hard in the pocket.  This is concerning to property investors as insurance costs were already going up in light of GST rises and increased claims in New Zealand as a result of the 4 September 2010 Canterbury earthquake – now general property insurance premiums will be much higher too.

3) Downstream costs from Government Policy

There has been talk by the Minister of Finance Dr Bill English today of removing the middle class tax relief that is Working for Families tax credits; and removing interest-free student loans. This will restore the policy to how I had in the 1990s at Auckland University where I could get my fees and course costs paid with a low interest rate (from memory it was just under the banks floating rates).  If we borrow too much it will put our plan to get to a Government surplus by 2014/15 into jeopardy prejudicing further Government spending or tax cuts.