We spoke last week about “cycles” in retail and many thanks to those of you who responded with interesting comments. We will revert to those after we have addressed “cycles” in property.
Property cycles have generally been determined as those that relate to the residential housing market. Every 5 to 10 years there is a trend that suggests house prices rise and fall. The trend is further exacerbated by the overall economy and the wealth of the population at the time.
In recent times, certain sectors of the media have endeavoured to drive a story that reflects a current decline in house prices across the country. We believe that the story is just that ” a story” principally with a low level of foundation.
We further believe that the only people effected by rising and falling prices are those people who are actually selling or buying. If you’re not doing either then you’re not effected, other than a negative mental image about your wealth.
What will influence ” the cycle” is whether you are comfortable in your employment and effectively ” feel like a change”. If somebody has over capitalised then sure they may be compelled to sell, and then the effect of a “willing buyer willing seller” impact will emerge.
As a nation our population continues to grow, both by traditional birth rates, which incidentally are well up on the norm currently, and by immigration. Therefore housing stock must keep up, therefore generally houses should continue to be sought after.
So the impact on residential property is inevitable in the overall context. Why don’t the economists understand this?
Not so, in our view for commercial property. The “cycle” here has traditionally seen some fluctuation in capitulation rates from time to time, which makes property more or less popular depending on your point of view.
However the current “cycle” has never been experienced before since the great depression, therefore there is no clear signal as to how it will recover. There are very few developers left in the market. It’s that simple. Why is that?
There is no credit available, again it’s that simple. Why is there no credit? Well the larger funders have no money and any money loaned by them they wanted back. This in turn sent the property market into a tailspin, and a surge of urgency to recover any funds on loan as quickly as possible.
What did this achieve? A crash fundamentally of commercial property and investors/developers, because they were so highly geared. Why didn’t the funders hold off seeking recovery? They couldn’t because they were under pressure from investors and the returns they promised were never achievable when property values declined.
Traditional banks who loaned to people in 2007 up to 80% of values, became very nervous and turned the tap off on funding anything that looked remotely risky. As a result despite the various Banks saying they have “plenty of money to loan”, they won’t or can’t loan it, as borrowers cannot meet the ridiculous benchmarks.
The banks have continued to persecute anybody they can get their hands on even if they have been banking with them for 40 years. Do they care? Not really, and the people who are in charge are remote from reality.
So will the market improve? In our view it has to and it will. However, this is where landlords and tenants have to play a joint role. A level of respect and understanding from each will see this “cycle” through.
We understand from commercial property valuers that we know, that the banks are determining property values not the valuers. How is that? Well any value received from a valuer is automatically reduced by the banks by 10% or more to justify funding and thus reducing their risk.
What does this do? Makes it unachievable for the investor/developer to do a deal and further reduces property values. Consequently “nil” activity. So what do we do? Hang on, money is no good stored under the bed or in the fridge. Sooner or later the “cycle” must start again.
Back to the retail comments that came in last week. Look, there is no doubt retailers are hurting, this is apparent in all areas throughout the country. This is where the major companies like Westfield, AMP and Kiwi have to be on red alert.
If they keep placing heat on people for over inflated rentals then you can kiss goodbye to some retailers. It’s that simple!! Will they help? We hear that Westfield are actually quite accommodating but AMP and Kiwi, are still living in 2006/7. Why is that? Well they have to keep faith with their investors and any shortfall on income affects their returns.
So, enough for this week. But before we go a couple of interesting observations from the DIY/Building sectors. Have you wondered how ITM are sponsoring the ITM National Rugby competition (some people still call it something else!!).
Some background. ITM have 89 stores nationwide and are effectively a cooperative. Sales for ITM’s support office, that’s sales by the cooperative to member sores, were $263 million in the year to March 2009.
This was a drop off 13% from the previous year!! By comparison, Wesfarmers that owns Coles, Target, Kmart, Officeworks and Bunning’s, showed earnings across their retail sector in both Australia and New Zealand increased by 15.8% for the year.
Here’s an example therefore of a company that has stuck to their knitting despite a morose retail environment. One wonders therefore about that sponsorship. We would have thought that either Bunning’s or Mitre 10 (who do about $950 million a year in sales) would have been a more affluent sponsor. So good on ITM and lets support them for looking after our National Game!!
Fletcher Building Shares - 2008 2010
Fletcher Building is a New Zealand based building materials manufacturer and distributor. Last week they reported net earnings of $301 million, down 4% from $314 million the year before. Generally revenues had fallen across all industries except building products- this was driven by government stimulus programmes leading to higher insulation sales.
Residential consents had increased by 13% over 2009 to 2010 while commercial markets had fallen by 14%. Residential consents have increased in Australia as well as the US, while non-residential activity had fallen across all three countries.
While commercial building activity looks weak in the near future, the increase in residential house buildings is expected to bring a positive sales momentum.
Share prices have been fluctuating between $8.50 and $7.50 since October last year then have started to fall this April. At current, the annual reports do not look like it was enough to stop this downward trend.
Retail News
‘Trust’ the new focus for service brands
New research shows service brands have put ‘trust-building’ on the top of their retail strategies.
A study by retail experience design agency Judge Gill of the UK found trust and building a better connection with customers in store has overtaken image in a service brand’s list of retail design requirements.
(Source: insideretailing.com)
‘Fashion capital’ loses its shine as sales dwindle
New Zealand’s premier shopping district could be losing its shine, with high numbers of shops forced to close and others selling almost nothing as they hang on.
It is not just small outlets that are struggling; a major shoe retailer sold two pairs of shoes during a working week in July.
(Source: NZ Herald)
