Market Views

COVID19: Notes from the field vol. 2

As New Zealand prepares to move into Alert Level 3 next week, we wanted to share further observations impacting the local commercial real estate market.

  • The Government’s economic response package has seen the reintroduction of depreciation on industrial and commercial buildings, which applies from the start of the 2020-21 tax year. This will have an attractive future post-tax cash flow impact for investors.
  • The Government is changing the Property Law Act to extend the cancellation period for commercial property leases with unpaid rent. The current ten working day timeframe will extend to 30 working days. The Government also extended the notice period before the banks can use their powers to take possession of a property due to unpaid mortgage charges - from 20 to 40 working days. The changes will be temporary and will expire six months after the end of the current epidemic notice.
  • The above measures do not address the immediate cash flow impact on tenants and, subsequently, landlords. It is possible that further contributions for landlords and tenants may still come in future government relief packages; however, this is not yet confirmed.
  • Some businesses will be allowed to operate at Alert Level 3 next week if they are safe – not just essential. Businesses cannot offer services involving close personal contact – unless it's an emergency service or essential service – and need to trade without physical contact with customers. This bodes well for some industrial tenants who can resume limited operations; however, there is no respite in Alert Level 3 for the embattled retail and hospitality sectors, which will predominantly remain closed.
  • There has been a substantial jump in rent arrears for commercial premises, according to commercial property management software company Re-Leased. 50% of the rent that was due to be paid on April 1 had not been received by April 13, whereas the average that would typically have been received by that time was 90%.
  • Retail was the sector most affected (37% of rent received compared to an average of 89%), followed by office (56% of rent received compared to an average of 92%). Industrial premises were the least affected, with 70% of the rent due by April 1 paid by April 13, compared to the long term average of 88%.
  • PFI (Property For Industry) signaled that it is withdrawing its FY20 earnings and distributions guidance, citing the considerable uncertainty with the impact and duration of COVID-19. Despite withdrawing guidance, PFI still intends to make quarterly distributions, but the quantum will depend on performance.
  • Kiwi Property reported a decrease of approximately $290 million (-8.5%) in the fair value of its property portfolio with assumptions around rental growth, vacancy, downtime, leasing up allowances, and trading conditions all softening. Their retail portfolio was the hardest hit, declining in value by over 20%. In contrast, Kiwi Property’s office portfolio remained resilient, appreciating in value by 1.6%.
  • Following a fall in value across three properties within their portfolio due to the ongoing COVID-19 disruption, Asset Plus has decided not to pay a final quarter dividend for the year to 31 March 2020.
  • Countdown has opened a new 8,800 sqm online-only store this week in Penrose, Auckland. The store will have no customers, only personal shoppers picking online orders. The site can process 7,500 orders each week.
  • Last week, the Treasury released a report outlining their scenario modelling for the NZ economy. The scenarios reflected various levels of constraints placed on the economy. Highlights from the report include falls in annual GDP that vary from a decline of around 13% in Scenario 1, the least restrictive of the scenarios considered, to closer to 30% in Scenario 3, which involves tight restrictions throughout the year. Peaks in the unemployment rate vary from around 13% in Scenario 1 to nearly 26% in Scenario 3.
  • Interest rates in many parts of the world are now at record lows. The Reserve Bank of NZ (RBNZ) has introduced a raft of measures to keep the financial system operating, including traditional interest policy, quantitative easing, and reducing the OCR. These measures will be successful in maintaining base interest rates at extremely low levels for an extended period. The OCR is expected to stay where it is until 2024.
  • The credit/risk premium applied by the banks on margins may widen in the near term, reflecting a heightened risk profile. This will lift the all-in cost of borrowing and go some way to offset the reductions in base rates.
  • Local banks are concentrating on managing existing books and have a lack of desire to take on new projects in the near term. However, Asian banks are now very active, with international banks seeing this environment as an opportunity to expand into the Pacific region, meaning access to capital remains.
  • In wider markets, Asia Pacific commercial real estate investment volumes fell significantly in Q1 2020, declining 23% year on year, according to the latest data from CBRE. Domestic investors are likely to dominate in the coming months as travel restrictions weigh heavily on cross-border capital flows.
  • US and European based debt funds and private equity real estate funds have large amounts of capital to deploy, however, they are focused on correctly pricing deals and stress testing valuations of assets.

Please feel free to reach out if you would like to discuss any of the above.

Mark Campbell
CIO & Director
Published 22 April 2020