Podcast: How Is The Property Market Operating Under Lock Down? | Ep. 210

Posted by Ed McKnight on 21/04/20
How Is The Property Market Operating Under Lock Down 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss how the property market is operating under the Covid-19 induced shutdown. This is based on real data collected by Tony Alexander of real estate agents and mortgage brokers who are working on the ground at this time.

This episode covers both residential and commercial property and how the two markets differ from one another.

We also mention the Opes Partners Instagram. Every few days we post a new educational carousel to teach you about the property market. Follow us on Instagram here.

Transcript

Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and today on the show we're going to be talking about how is the property market operating while we are all under isolation, while we were all in isolation, this is a really hot topic at the moment and I note that Tony Alexander, independent economist who appeared on the show only a couple of weeks ago, actually, he recently did a survey of 240 real estate agents and mortgage brokers and had 53 detailed responses about how the market is operating while under lockdown and what's actually happening out there.

So we're going to summarise this for you because it makes for really interesting reading, because there are different segments of the market that are operating and reacting differently. First of all, first home buyers are exiting the market. Some people, some of them have been hit hard by the decreases in the share market. And so if you've got 20 or $30,000 in KiwiSaver and that's just dipped by 20% odd, and you've lost $6,000 or something along along those lines in a very short space of time, then you may no longer be able to be active in the market.

And so we're seeing some first home buyers holding off. The other thing that's really interesting is some banks are treating income at the lower rate. So if your job is currently paying you 80% of your income, or you're just getting paid the government subsidy, then the banks are treating that as your income, not what you're actually contracted to receive, because they can't prove that you're actually going to earn that again, because we don't know when the lockdown is going to be lifted.

So some people are having their mortgages reviewed, and analysed at significantly lower income than what they would actually usually earn. And that's meaning that they're not able to borrow as much or be approved for as much in this timeframe and so aren't able to be active. And I think the other thing that's kind of obvious to say, but worth saying anyways, obviously none of us can get out and look at open homes.

And so the property market is much quieter anyway right at the moment. But what we are seeing is that some larger investors tapping their real estate agents on the shoulder and saying, "Hey, do you have any deals that I can look at now?" It's probably a good time to see if I can get a good deal out in the market. So we're seeing first time buyers being a bit wary of the market, and really experienced investors looking to get into the market. So a bit of difference there.

The other thing is that smaller investors, mum and dad kind of investors who own a couple of residential investment properties, they're really worried at the moment about not receiving rent because they still have a mortgage that they're going to need to pay unless they go and do the mortgage holiday. But they'll still be expenses there. So they don't want to defer rent, mortgage payments rather.

And so they still want to have their rent come in, but are really worried about that. So those are some of the big things I'm reading here about how different buying segments are reacting in the market. There are some vendors holding off doing proper marketing on their property so it can be done when the lockdown ends. That really makes sense. So we're having a decrease in supply, but there will be some vendors who decide not to sell at all.

So even though we have a decrease in demand, we've still got a, we'll see a requisite decrease in supply as well, which is going to mean that fewer properties are likely to be transacted, at least in the very short term, which kind of makes sense because with the way contracts are being handled at the moment, not many properties are settling either, are they Andrew?

Andrew Nicol: No. So this is actually something that I spoke to my personal lawyer about today because I wanted to get some direction, because she helps out a lot of my clients. Sue Foley in Christchurch, who's a fantastic lawyer. There's not a lot of clarity, there's some guidance from the Auckland District Law Society, but it's not set in stone around what happens with settlements. So the general rule of. thumb at the moment is that so long as both parties agree, then settlement will occur after we come out of lockdown.

Now there's two parts actually in Tony's notes that I was just reading here, one says ten working days after we turn out of level 4 and another part says until we enter level 2. So there is some questions around whether or not a level 2 or a level 3 is an environment which we can settle. I think it will just depend on how long level 4 lasts. Now I know, for example, with one property that I've got which has been sold and we're waiting settlement at the moment, we've agreed to allow them to settle ten days after level 2. But in hindsight, that was probably a bit generous because if at level 3, we can go and see our lawyers so long as there's social distancing there, or there's appropriate measures in place to protect people's health, then you can absolutely settle at a level 3.

Now again, there's nothing in the contract that's stops someone forcing a settlement though. However, there is probably because this is an unprecedented situation, there is probably some goodwill that were to be had if the developer has got someone that's due to settle or a vendor has got someone that's due to to settle, giving them the appropriate time to do the checks and the necessary steps that would happen had we not been in a lockdown. For example, normally speaking before you settle you would do a pre inspection, so you'd make sure a pre-settlement inspection to make sure everything is as per what you agreed to in the contract.

Now that's whether or not it's a build or or whether or not you've just bought and people with moved out, you want to make sure that the house hasn't been damaged in the shift or anything like that. Obviously you can't do that while in isolation. The other thing is often people require a valuer's certificate or a valuation before they settle and people generally leave that to the last minute because that's something you do when the house complete if it's a build and that can't be done because a valuer is not at this stage considered in an essential service.

Although there has been a question mark around because finance is. So these factors stop people being able to settle so it would be fair for both parties to agree that once isolation lifts that as we will settle however you might see that some developers, and actually I know of one instance, where a Melbourne company did force people to settle during lockdown, which of course means that people have houses that are sitting vacant and can't put tenants in. If you are moving into the house yourself as an owner occupier absolutely not at that stage. You settle because you can't use a removal van.

Ed McKnight: And similarly, there's, there's some changes happening in the commercial market and arguably the residential property market is much more robust than the commercial market. And that's for two reasons.

One, commercial property is the values of commercial property is typically set off the yield and obviously with rents decreasing and some businesses no longer needing premises, if they're going to be scaling back, then the yields are going to go down, go down in terms of the total rent collected from a commercial property, which means that the value of the commercial property is going to go down as well. So there's one hit there, but the second hit, which are kind of intimated is that some businesses, if they do unfortunately fail and no longer need, are no longer going to need premises.

And so there may be a contraction and the number of people who actually need commercial properties, there's going to be a decrease in demand, which is going to hit rents as well, which again, is going to hit the value of those commercial properties. So I can understand that commercial landlords are going to be much more worried than residential landlords, because everybody, no matter what happens is still going to need places to live.

Businesses that are no longer in business, no longer need their premises. So that's going to be quite worrying for commercial property investors as well, and I know one other thing is that some banks have indicated when looking at business at, at lending to businesses have said that they have no interest in lending to property developers, property speculators or construction companies. And that's because these sorts of businesses are really cash hungry and they need cash flow within their businesses to keep on going.

Now, the thing there that I just note is that if property developers aren't able to get financing, construction companies aren't able either. That's going to mean that down the road we're going to have a decrease in supply relative to what we otherwise would have because we don't necessarily have the same level of property development going on or construction occurring, and that's going to mean that we have fewer residential houses coming onto the market to ease the property market as we have increases in demand from people moving here or, or the population organically increasing. So that's going to be good for people who own property. It's not going to be so good for people who are looking to to buy their first property.

Andrew Nicol: Just want to add on that commercial space as well Ed, that there is a lot of people who are owning businesses and they can't access their commercial premises at the moment applying for discounts in their rent. Even companies like The Warehouse and Harvey Norman are either not paying rent or paying substantially less like 50% of what their normal lease would be, because they can't get access to their premises.

And there is a clause and the ADLS agreement, a lease, which basically stipulates if you can't have access, then you don't have to pay rent. So people are using that to reduce the amount of their rent they're paying now, remember, commercial investors, likely still have a mortgage to pay, and so they're probably going to come under harder times than residential and as Tony says, and they otherwise said recessions when it comes to a recession, commercial is harder hit, because people always need somewhere to live, but failing businesses stop needing premises.

Ed McKnight: Yes, and that clause in the, standard Auckland Law District Society contract actually came about because of the Canterbury earthquake. So you remember that Andrew?

Andrew Nicol: Absolutely. Completely, because I remember getting it removed from our lease.

Ed McKnight: Yes, well unfortunately, back then during the Canterbury earthquakes, there were a lot of buildings that were red zoned but they weren't damaged. And that means that they, their businesses who were leasing properties that weren't damaged, even though they couldn't access them, still had to pay rent, but they weren't able to apply for rent relief because the building wasn't damaged, but they still couldn't get access to it and all of their files because it was in the red zone, and that's where a couple of property lawyers got together and made this specific clause, which is now being exercised.

And I just mentioned as well with some of the larger commercial landlords. So I'm thinking of Kiwi Property, who owns several of the malls and own Sylvia Park, they've got those bigger commercial landlords have their own commercial contracts that don't include that clause. Some people may have read the article that was in Newsroom over the weekend, where small business owners were receiving letters from Kiwi Property reminding them that they still have to pay rent unless there was a clause in their contract that specifically said they didn't.

And of course, because they are using a custom contract, it doesn't have this sort of clause, which is in the standard Auckland Law District Society contract. So that's really interesting as well that, some of the big commercial operators won't be hit by this. It's going to be the small ones.

Andrew Nicol: And also, I know, I do know that they've stopped paying out their dividend payment to their shareholders though.

Ed McKnight: Well, that still makes sense in these times. Look let's wrap it up there. Please don't forget to rate, review and subscribe to the podcast. It really does help us get the message out to more and more people and hey if you're interested in property, why not check out the Opes Partner's Instagram. Every second day we release a new educational post that gives you some new insight about the property market or we'll drop a new piece of data in there. It's very, educational.

We are at Opes_partners or I'll also link to it in the show notes, so just tap or swipe over that cover art. It'll take you right there.

Thanks for listening to the Property Academy podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and we going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.