2005 Property Market Review

So what are the key advantages of sound, well-managed investment property portfolios;

• Low volatility, providing the comfort of relatively stable investment values,
• Low correlation to other investments, producing stable income streams when other forms of investment are not,
• Constant higher levels of income
• Hedge against inflation, ensuring both your capital value and income grows over time.

Summary

No matter where you think the real estate market is headed – and there are plenty of opinions on that – it makes sense to check history before making any investment decision. We are proud to be able to report that over the 20+ years of investor’s returns from Guideline property investments, the annual average property income distribution has been above 10%. When added to estimated capital appreciation the annual average estimated total return of all Guideline properties has been around 20%. Whilst we are confident quality management has contributed to results like this, of equal importance is the old adage “ success in property investment is largely about hanging on when others have let go”.

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In recent months interest rates have been rising and most analysts are preparing investors for lower share market returns over the next year or two. Against this backdrop the “key advantages” of sound property investment will again be demonstrated. Statistics highlight the generally reliable property returns that investors have been obtaining (refer Property Council Performance Statistics later in this report).

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The Tauranga property market remains constrained by a shortage of land suitable for commercial/industrial development. Although there have been new areas opening up land (Papamoa) and announcements about others (Tauriko and Rangiuru), the time required for the latter to come on stream will see continuing shortages and high prices.

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The Auckland market has been spreading in all directions. Price and rental growth have finally been occurring. We have waited some years for the increased costs of new development to flow through to existing stock in the form of rental increases. Central business district vacancies have now fallen below 10%, with prime office vacancy at about 6.5%. On the industrial scene vacancy levels are at all time lows, by one estimate below 2%.

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The slowing economy will surely put a damper on the rate of future rental increases.

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Despite our constant effort in assessing opportunities, and due to the selection criteria we have prescribed to ensure our confidence in the long term potential of our offerings, we have only unearthed one new investment during the year under-review.

Other Current Trends

we are seeing now include the increasing development of “business parks” which include elements of commercial, warehouse, manufacturing and showroom etc, being set off in nicely landscaped grounds. Buildings are generally getting larger and considerably more expensive. The regulatory environment not only increases the complexity associated with managing existing property but is also dramatically affecting new development and is a considerable driver in construction price inflation.

In the medium to longer term we predict the office decentralization trend will gain pace. Modern technologies mean businesses no longer need to be located in central business districts (CBD).

CBD’s are becoming much more people oriented places with the growth in the café culture, apartment living and tourist accommodation. Whilst this is a global trend, just look at what’s happening right here in Tauranga. Demand for the quarter acre home plot is declining as the ratio of persons per household declines.

Overseas shopping mall operators (like Bayfair) are now developing the more open-air streetscape oriented complexes (like the planned Papamoa Boardwalk) and are tending to move back towards the main street. A similar trend is undoubtedly unfolding here too.

Institutions are adding considerably to their property exposure, in moves that reinforce our view that the academic model for asset allocation has been deficient (see “We See Those Benefits Continuing”). Especially Australian institutions are aggressively buying New Zealand property assets.

Selling is not in their game plan, leaving the smaller investors in the position we reported on above, findings it exceedingly difficult to acquire quality property opportunities.

As existing holders of property, we are in a valuable market that new entrants will find difficult to enter without excessive risk taking.

The Changing Economic Environment

..will result in changes in the direction of property price movements over the next year or 2. However, well-managed investment property will continue to be a profitable inclusion in any investment portfolio.

Over the last 5 – 10 years those with a higher weighting to property have enjoyed considerably better capital preservation/growth and much sounder income streams than those relying upon other investment sectors.

We see these benefits continuing

..and go so far as to suggest that the popular academic asset allocation models have often left investors in a poorer situation than those with higher proportions of their investments in property.

We continue to ask the question, “What investment could you have made over the last 10 -20 years that would have rivalled a selection of Guideline property interests, for returns and reliability?”

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, and their most secure investment, needs.

The proof is in the pie

..,as we have long argued for the benefits of growing a portfolio of property interests. The returns, income growth and relative reliability obtained by those of you who have followed this strategy overtime, emphasize the real value of property investing. You will continue to be rewarded for building a portfolio of sound property investments.

We are pleased to reproduce the following testimonial from a long-standing client reinforcing, in their words, our findings about property investment rewards.

We first invested with Guideline in 1985. I was very impressed with Brian’s honesty and ideas on investment and as such, invested in our first property. Our portfolio has grown from the one property to several different properties. These have been able to be funded from reinvesting the yearly dividends back into properties sourced and recommended by Brian and Guideline. Our initial $30,000 investment has grown to over $630,000 with dividends and capital growth increasing each year. If you are looking for an investment that is solid with excellent longer-term rewards, then we can strongly recommend you have a talk to Brian and the people at Guideline Investments.
As you can see the figures speak for themselves.

The Property Market

…as we have been saying, has been displaying price trends associated with extremely high levels of investor demand. When those trends have been running for a while it becomes 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 that 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. Of recent times however, we believe the “drivers” and trends are showing signs of slowing, if not regressing.

We would point out that interest rates are rising around the world. Immigration and our economy are both in a slowing down phase. This combination should take some more of the heat out of this market.

And from another client;

What great news. Congratulations on a job very well done! We know how much effort you put into these projects and really appreciate it. Yes we would like to continue with the next project.

The trend of investors accepting lower initial returns has continued throughout the year. Here in the Tauranga and Mt Maunganui area it is now common for investors to buy on the basis of *gross returns of around 7%. There have been a number of examples of around 5% gross returns being acceptable. In Auckland investors too have been accepting lower returns. They must be less naive than local investors as their required returns for good property have generally been above 8%.

We are unable to find justification at either of these levels. By any rational assessment property associated risk definitely requires better net returns than many are accepting as gross.

On the same basis, our average annual income distributed 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?

To be sure your receive

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

Email your details to property@guideline.co.nz, or mail to PO Box 268, Tauranga.

Some of our property Statistics

Over the last twelve months our activity has included:

• Rent reviews for 13 tenancies (with 13 increases plus 0 concluded after 31/3/05)
• 0 rental reductions
• 0 reviews incomplete at this time
• 8 new leases
• 3 re-negotiated expiry’s
• 61 total tenancies
• 5 vacancies

Disclaimer: Opinions and views expressed herein are based on our assessment and sources considered reliable. Neither Guideline Enterprises Limited nor its officers or staff accept any liability for any error or omissions.

* Gross returns in our terminology are the returns received before the payment of legal and other purchase, annual management, accounting and sundry owners costs. These are the costs normally ignored in typical real estate advertised “net costs”. Our estimating of net returns also accounts for an operating contingency and the provision of a Long Term sinking Fund (LTSF) allowance. These items will collectively make a difference of around 1%.