All Topics / Overseas Deals / My Thoughts On NZ

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  • Profile photo of Steve McKnightSteve McKnight
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    @stevemcknight
    Join Date: 2001
    Post Count: 1,750

    Hi,

    Here is an interview that I did with a journalist on the topic of New Zealand real estate (circa Jan 2005). It is interesting to see the comments as I still feel they are valid, albeit that interest rates are higher again.

    Is Steve positive about the NZ market at the moment? (If not, why? If so, why?)

    Since January 2004, the NZ Reserve Bank has upped its official cash rate seven times meaning its benchmark rate is now 1.75% higher. After a several month lag, it seems the destabilising effect of these rate hikes has finally eroded investor sentiment, most evident in the Auckland where the property market isn’t as buoyant as it was even three months ago.

    Generally, I feel the NZ property market has well and truly peaked, so I wouldn’t be recommending investors partake in speculative deals with a view of earning quick profits based on broad-based capital appreciation. Nor would I be encouraging investors to buy long-term buy and hold deals either, as property prices are more likely to fall rather than rise in the short term.

    What I do like though are the 10%+ yielding properties in outlying regional areas that exhibit strong industry and infrastructure. In my opinion it is these properties that will outperform in the coming 12 to 24 months whereas off the plan concrete coffins in the sky (i.e. inner city apartments), which are already in oversupply, are likely to be a much riskier investment.

    Finally, while there are buyers willing to pay a reasonable price, it may be a good time for investors sitting on significant unrealised profits to consider selling in order to cash in their gains. The same is also true for investors minimising losses on underperforming real estate too.

    Has NZ been thoroughly picked over by investors? Are there positive cash flow opportunities still?

    As in Australia, the vast majority of NZ investors have focussed on capital gains rather than cashflow returns, and as such, have tended to by-pass higher yielding regional areas in favour of larger population centers such as Auckland and Hamilton.

    With values rising and yields dropping in these major business centers, investors are now seeing the sense of buying cheaper rental properties (say up to $70,000) that are already delivering gross returns of 10%+.

    For example, a recent purchase we made was a block of 10 units that we bought in a North Island regional center for $230,000 on a gross yield of 10.28% per annum. You’d be hard pressed to find that sort of return in Auckland – or Australia.

    It’s true then that investors have certainly given the kiwi property market very thorough once over, but there is plenty of opportunity remaining for investors who think differently to those who focus solely on acquiring long-term buy and hold metropolitan property.

    Is NZ property overpriced?

    Property is only overpriced if it doesn’t sell, and at the moment it seems that NZ property is still ticking over, albeit not as fast as it has in the past 12 months. This is more evidence that the market may have now passed its peak.

    For those buying, it really doesn’t matter what a property was worth yesterday… all that matters is what it is currently worth in today’s market. For example, if you’ve identified a realistic profit making opportunity buying on the advertised price, does it matter that the property has just doubled in value in the past 12 months? This said, you must have a strategy for profiting rather than just a hope that prices will rise.

    Personally though, I don’t think the current general property market – in Australia or New Zealand – is sustainable in the medium term. Property values will need to fall and/or rents will need to rise in order to improve the profitability for investors. Otherwise, the money will flow back into the stockmarket or other investments offering better returns.

    Does he think the NZ market has changed in the past few years and if so why? What’s the outlook for the near-term?

    The New Zealand property market has certainly boomed in the past 18 months, but nowhere near the extent of Australian real estate prices. This is because NZ interest rates have been higher, and because kiwi property seems to have much stronger decline phases that has subdued demand compared with the Aussie experience.

    While prices may have risen though, the fundamentals are the same. That is, demand and greed drive prices up, while lack of affordability and fear will drive prices down.

    Unless the NZ Reserve Bank dramatically increases its benchmark cash rate, the general kiwi property market is likely to be flat or mildly negative in the near term.

    For Australians then, New Zealand house prices will, at first glance, seem cheap in comparison to Sydney, Melbourne or Brisbane values. Yet this belief is a false economy, as incomes are lower in New Zealand while interest rates are higher, meaning that it is not accurate to compare on price alone.

    It would be much better to base your comparison on returns and factor in an appropriate risk premium for buying overseas property. For example, why would anyone invest in NZ and earn a 7% yield, when they can do the same in Australia? That’s why I always demand at least a 10% gross return on all my New Zealand property.

    Regards,

    Steve McKnight

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    Profile photo of Don NicolussiDon Nicolussi
    Participant
    @don
    Join Date: 2005
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    Hi Steve,

    Thanks for posting. I agree and believe your comments are still valid a year on.

    In my adopted home town of Invercargill property is still “ticking away” and there are still 10% gross yield opportunities. In Fact we have been finding yields 12 to 14%.

    Employment is increasing at many times the national average and rental demand for “good properties” is very strong. In meetings over the past few days two rental managers report multiple applicants for “good properties”

    The SIT has announced the continuation of the fee free education scheme for another three years and three new bachelor degree courses have commenced.

    However, aussies continue to buy property in well known no go zones and continue to be the very worst of offenders for deferred maintenance. At a meeting of the southland property investors association a guest speaker commented that in the 04/05 year 80% of official complaints were about properties owned by Australians. We perhaps underestimate the challenges of remote property management.

    Regards,

    Don


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    Profile photo of shaunwalkershaunwalker
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    thanks steve.
    i just sold out on my nz property, i bought my last one for 96k in august, just signed off on the contracts to sell for 118k.
    not bad for 3 months work.
    i only spent about 3k doing the place up.
    i also agree there are still deals there, when i was on the kiwi adventure (2) i found a 14% yeilding property but instead of buying it i had coffee with dave instead [blink].
    my other concern is the nz reserve bank has said it will directly invtervien and stop kiwi’s from taking on more household debt.
    how they are going to do it is anyones guess, the speculation at present in nz is a CGT or some such thing.
    will be interesting to see what happens in nz this year

    cheers all
    shaun

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    Profile photo of Nigel KibelNigel Kibel
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    I agree to a point however if you buy in a city like Christchurch and you recieve a good return with long term capital growth I still feel tis is worth while. There are many people whoo wish to invest but cannot afford to be out of pocket. That is very hard to do in Australia unless you want to purchase in a one horse country town. That is a far worse stratagy than buying in a city in New Zealand. I would not buy in a country area in New Zealand anyway.

    Where do you suggest people should invest Steve, Australia, New Zealand or parts of the United States. Have you purchased in Buffalow?

    You are an experienced investor and many people here are interested in your views.

    Nigel Kibel

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    Profile photo of Hux001Hux001
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    I’ll take 10%+ in a growing area anytime. New Zealand has a lot to offer but you have to look harder now to find good deals.

    Profile photo of sydneysmartsydneysmart
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    @sydneysmart
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    Post Count: 10

    hi steve
    my advice to any aussie thinking of investing in new zealand is (1) check the facts on capital gains tax etc speak to a property smart accountant here and also in nz (2)auckland units are butter boxes ,i even found a 40 sq mtr 4 bed unit (3) talk to agents who are resellers not the developers or their agents ,the honest ones will tell you the majority of tenants are asian students they sign 12mth leases and as soon as exams are over see you later charlie and you have litterally hundreds of empty units for 2mths until uni starts again,in the last 18mths the prev high rents have been dropping rapidly as the developers keep building ,i counted over 20 cranes in auckland cbd ,i have never seen that in sydney ,look how long it has taken to clear the gluts in sydney and melbourne and they dont have the population or industry like us ,in two trips i spent a mth over there and used a motor home to cover auckland and all the main regional areas nth and sth,my opinion auckland units no way ,the nth shore has some good areas you can make good money doing renos and flipping them and there are good industrial units with good returns, i was flabbergasted at some of there seachange areas prices,my holiday home a waterfrontage at forster keys forster nsw is a bargain at $700000 compared to some of the multi million dollar way over priced properties i saw ,when the bubble bursts over there ,it will make hih look like a tea party ,anyway thats my opinion and it could be worth jack<edited>,so we will have a little joke my friends,WHY do the kiwis drink out of saucers ! because the Aussies won all the cups! ps still a great place for a holiday, i will be going back ,that is if they will let me in Sydneysmart.[baaa]

    gjedwards

    Profile photo of muppetmuppet
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    Hi Sydneysmart

    You said:

    WHY do the kiwis drink out of saucers ! because the Aussies won all the cups!

    What is the Wallaby Rugby team drinking from then?
    Didn’t notice them winning much last year.[baaa]

    Regards

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    Profile photo of JackHuJackHu
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    @jackhu
    Join Date: 2004
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    Steve, thank you so much for the reply.

    We have a house in NZ but we don’t live there.
    Do you suggest us to sell it now?

    thank you

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    Profile photo of Don NicolussiDon Nicolussi
    Participant
    @don
    Join Date: 2005
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    forster keys – very nice part of the world – we used to call it florida as kids because of all the “high pants” and white shoes.


    D&L Property Projects Ltd
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    Profile photo of westanwestan
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    @westan
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    Hi All

    Steve your comments about NZ are interesting given you wrote them in early 2005, but over the past 12 months the market has changed. This is the way i see it –

    I’ve lived in NZ for the past 2 year and invested there also, However over the past 12 months i’ve sold about 25 properties, i still have 1 which is for sale, i’ve just had it painted.

    You rightly mention that interest rates have risen- this is true and impact should not be underestimated, rates are now 9.5% (variable fixed are less) and may go higher. This is significantly higher than 12 months ago. This has a huge impact on cash flow and 10% returns aren’t enough today (to put cash in your pocket).

    Secondly the outlook for the NZ economy isn’t as strong as it was 12 months ago.

    thirdly the market has peaked and I feel now is a good time to sell, especially while there are still buyers around. I believe the NZ market will follow the aussie market (well it has been over the past few years) and soon the buyer interest will disappear. So if you own be prepared to hold for the long term or get out now.

    I might be wrong (obviously i don’t have a crystal ball) all i’m sharing is my take on what i’ve seen in the 3 years i’ve been investing in NZ.

    regards westan

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