2004 Property Market Review

We are now in the 20th year in the life of Guideline’s property investment programme. It is extremely gratifying to look back over those years and observe the number of you who have been enjoying the benefits of the properties we have been able to offer, some since the very beginning. We remain as determined as ever to do our best to generate top reliability and profits across our portfolio and continue to implement improvements to our processes and management to this end.

Summary

Over the last few years we have in our annual market report discussed price trends and emerging investment property types.

It has again been a year during which interest in property investing has continued to grow. We have been pleased to receive your enquiries, but disappointed that the market has not been conducive to our being able to meet our acquisition criteria and thus your interest.

It has been a year in which real estate agents have been the busiest they have ever been, yet investors have been accepting lower and lower returns.

The rising prices have been driven mainly by falling capitalisation rates. That is to say the underlying investment value driver (increasing rental income) has not changed at the rate that should be required to match the price increases. As a consequence we have continued to see sales of properties at prices that don’t, in our view, sensibly reflect the traditional risk/return equation.

As usual, there is a mixed bag of economic influences including rising global interest rates and the share market recovering some of the ground it lost over the previous 3 or so years, and,

• Lower NZ$, improving exports and our trade balance,
• Home price rises dropping off peaks, maybe even leading to falling values,
• House sales numbers falling,
• Construction costs have dramatically risen
• Lower construction approvals
• And Govt budget and pre-election largesse.

A recent Westpac Weekly Commentary had this to say;

..new spending plans will see a shift in the fiscal stance from contractionary to expansionary…..

This last item particularly, in our view, has lead to a small recovery in business confidence and supports our view that existing property investment should remain strong. Rentals have some catch-up and the current “over-pricing” may become absorbed creating some new investment opportunities.

The yield gap between interest rates and property returns are closing. We are seeing rentals start to respond and look forward to capitalising on this trend with higher distributions over coming years.

A sound long term approach

…to property investment continues to produce investment returns that are more consistent and reliable than most other options. Across the Guideline co-owned portfolio we have estimated an annual averaged total return (on a since inception basis) of nearly 20%.pa.

We continue to ask the question, “what investment could you have made that would have rivalled a selection of Guideline property interests for returns and reliability?”

Property Investment Continues to Grow in Popularity

…not surprisingly given the returns and volatility attaching to share markets and fixed interest. It seems more than rational for investors seeking stability and good returns to turn to well managed quality property to meet their long term needs and their most secure investments.

We have long argued the benefits of growing a portfolio of property interests. The returns and income growth produced over time emphasise and continue to reward you for building of a portfolio of property investments.

Our Search for new Guideline offerings

…continues as we assess several options each month looking for the combination of features that will provide sound long term investments.

Patience is a virtue. To source the sorts of properties that will enhance your investment profits we do need to be patient. We have seen a number of investments offered that use mortgage debt to leverage higher returns. This strategy eventually fails as the extra risk that it implies must come to roost at some time.

To be sure your receive

…advice of any new investments please contact our office and check we have your email or other contact details.

The Property Yield Gap

…is the term given to the difference between bank or deposit interest rates and property returns. Using the 90 day bank bill rate as a proxy for interest rates our property returns continue to display worthwhile advantage, and of course have demonstratively shown growing income streams over the years.

Relatively low interest rates also make it attractive for investors to borrow, leveraging up their returns on capital invested.

Interest rates move up and down over time but do not display the upward trend that property rents do over time. As a risk management strategy we prefer to look at achieving property returns above the borrowing rate. This has recently been around 7.5%pa. Ideally investors should be looking to a margin above that in their property returns. That margin is the “yield gap” we recommend you use.

Clearly, paying a price that results in a true net return less than that is questionable investment behaviour.

The Property Market

…as we have been saying has been displaying price trends associated with extremely high levels of investor demand. When the trends have been running for a while it become natural to see the less popular areas attract the overflow and start to experience price rises. This has been occurring in recent months.

Areas like Rotorua, Hamilton, Dunedin etc have historically presented higher returns on investment (due to lower demand and therefore lower liquidity) have more recently benefited from the overflow of demand elsewhere.

However, we believe the “drivers” and trends are showing signs of slowing, if not regressing of recent times. Bayleys Research Bulletin (April 2004) points out that Auckland Central overall vacancy has been rising from 9.9% a year ago to 11.95% now and rural sales recently at historic highs are meeting some resistence. We would point out that interest rates are rising around the world, and immigration and our economy are both in a slowing down phase. This combination should take some of the heat out of the market.

Investment Returns to Compare

…across our co-owned property portfolio we have estimated the total return per annum at approximately 19.8%. This is estimated as a pretax equivalent (at 33%), accounts for all costs and sinking fund allowances, and is on a since inception basis for all properties.

Whilst there is no data to effectively compare this to, we believe that Guideline co-owned properties have across the board met or bettered our serious investors expectations.

On the same basis, annual income is estimated at 10.45%. What other part of your investment portfolio has protected your capital wealth and delivered income so well, over an extended period of time?