Blog: The Landlord says...

The latest stats from REINZ and QV in the past week have shown that the property market is still falling. The questions many people are asking are how far will it fall and when will it reach the bottom?

From a property investor’s perspective the question is possibly slightly different: Should I sell, hold or is it an opportunity to acquire more assets?

Looking through the papers and talking to various real estate agents, it seems there are quite a few investors cashing up at the moment.

I would have thought it was about six months too late to be doing that.

With such a big gap between purchasers and vendors’ price expectations, selling only makes sense if there are pressing issues like cash flow (arguably, many refinancing home loans will be experiencing that with rates in or near double digits).

One conversation I had the other day with a long-term property investor has a tip many can use. This person, Val and her husband Peter, are being profiled in the next issue if the NZ Property Investor.

Their story has many interesting angles, but one part of it is that they provided seed money to help all three of their children get into the property market some years ago.

One of her daughters decided a number of years ago to sell a property as the market turned, thinking that it was time to sell up and put the money in the bank for a while.

At that time, just like now, bank rates looked pretty attractive.

However, when the daughter went to re-enter the market again she found it extremely difficult to do.

The reason? When markets hit the bottom, their initial recovery, or bounce can be quite strong. A couple of messages here are; stay in the market if you can, and don’t try to pick the dead bottom of the market. No-one can do that and if you get it wrong and are too late, then you will miss an opportunity.

One of the questions that the NZ Property Investor has been trying to answer is, can people make money out of packaged property investments and if so, how much?

To answer this it was necessary to try and understand the model being used by these companies, and who pays what to whom and when.

Answering this question has become quite difficult.

One way of looking at the sector is to compare it with other investments, with perhaps managed funds being the most useful.

Here is how to think about it. As an investor wanting to buy either shares or residential property, you have two ways of doing this. One is buying the asset directly and the other is to use professional management.

Many Kiwis buy their property directly and actively manage it. That is, they will determine their strategy, find suitable properties, arrange the finance, do the deal and manage the investment.

In this approach they are directly exposed to all the gains or losses in their investment selection.

Likewise, if I want to buy shares, I will determine what I am looking for (eg: growth potential, dividends, defensive stocks etc) and I will buy and manage the portfolio myself.

Under this method I will get all the gains or losses.

Using the professionally managed model, things are a little different.

If we take the sharemarket example I can pick any of around a dozen fund managers (this includes the big names such as AMP, ING and TOWER through to smaller firms like Fisher Funds and Milford Asset Management) and they will do all the work, selecting shares, researching them, monitoring them, paying tax and so forth.

They charge a management fee and in some cases have a performance fee as well.

These are clearly described and there are general industry standards about fee levels. The performance of these funds is regularly reported so people can see what money is being made.

As an investor I will get the performance of the fund, less fees and expenses.

Now we come to packaged property or professionally managed property.

This is the equivalent of the fund manager and shares.

The packager will find properties, do the transactions, look after the building and tenant management etc – all the equivalent types of things a fund manager does.

The difference is that these properties aren’t covered by securities law and the documentation around fees and management expenses isn’t transparent.

It is difficult to see what they expect their “funds” will return and who is earning what along the way.

Also there is a major difference. One of the selling points for a managed fund is that it owns lots of different shares and is diversified so if one goes badly hopefully performance will not be too badly affected because other shares are doing well.

With packaged property, investors are buying just one “share” at a time and therefore expose themselves to much higher risks than if they owned a diversified portfolio of securities. (This is also true for direct investors). Added to that there is a high degree of leverage and part of the return comes from tax credits and depreciation.

One of things which is clear to The Landlord is that there needs to be more rules around some of this property investment. It’s a point argued before, but something which the Minister of Commerce picked up on this week too.

PS: To see your our in-depth article on how these companies work, pickup this month’s issue of the NZ Property Investor Mag, either here, or by calling 0800-345675 or visiting your local bookstore.

There should not be too many surprises in the latest set news on house prices in Auckland.

While the fall in the number of sales was huge, 52% on a year-on-year basis it shows, I think, that there is a huge gap between sellers’ expectations (over-inflated) and buyers’ offers.

Added to that getting finance is proving to be a much tougher proposition too.

What has been interesting is the angle from Barfoot and Thompson itself. It rightly points out that compared to last month the prices are up. However, it didn’t say, as this story does, that on a year-on-year basis (the same measure as used for volumes) prices are down.

The B&T numbers, while just Auckland, are useful as the firm is the largest in Auckland, and the numbers are often seen as an indicator of what is happening across the country.

The next set of data from QV and REINZ are due out in the week commencing April 14.

The BNZ’s report on housing prices isn’t necessarily telling us anything new on prices. We know the market is over-valued, and that it has to fall.

Just look at the hundreds of stories we have seen in recent month on home affordability.

All markets go through cycles where assets get over-valued and then come back. Often, like the New Zealand sharemarket at present, they actually become under-valued and present investors with great buying opportunities.

If you go through a sharebroker’s price list at the moment you will see nearly every decent company listed on the NZX is trading at a discount – that is you can buy the shares for less than what their assets are worth.

It’s like having an Easter sale again.

The question for the housing market is how far will house prices fall and will there be “cheap” houses for sale? No doubt about it – yes there will. But not every house will be “cheap”.

People need to be careful about taking predictions about where prices are going and then apply it to every sale.

One of the issues though is that it is getting harder and harder to borrow money from banks.

In the past week the big banks have started to tightened lending criteria and some of the smaller, non-bank players are under pressure too. Some have disappeared already and many of the lo-doc lending products used by property investors have been pulled.

Added to that rates are high. We track home loan rates on landlords.co.nz and there is nothing below 9% and plenty of rates at or over 10%.

Money is expensive.

But the good news is that the housing market won’t crash. Buyers waiting, there is strong employment and at some point (maybe this year) lending rates will come down.