Crystal Ball Gazing

I am always intrigued by the amount and type  of training and education that goes into preparation for various occupations. We know that different occupations require different skills and training.

I have always thought that part of the training to become a hairdresser was a basic course in inane chatter. Something like “Talking Drivel Level 1”. And if you didn’t pass Level One, which must comprise current Shortland Street plot lines, the activities of all English minor royals, and the latest on some family called “Kardashian”, then you wouldn’t be able to progress to Level Two Talking Drivel. Which of course is seriously inane drivel. How lucky we are that these courses are not part of the pre-requisites for becoming a real estate agent.

Personally I have generally paid a surcharge to ensure that when I get a haircut , it is without the inane chatter. Although as the hairline recedes and the hair thins, I am sure the surcharge to haircut price ratio increases.

But recently I obviously failed to pay a sufficient surcharge, as I listened to a story about having tarot cards read – and how eerily accurate the reading was.

Now all cynics know that flipping over a bunch of cards is not going to give us meaningful insight into the future. The most plausible tarot card readers are able to predict only the future that is probable according to the past.

If we happened to be a cynic, which of course we are not, we would contend that the best card readers (and mystics, and psychics etc)  are using three elements in their pronouncements:

  1. They are using what they know of the history of the subject, and subject matter.
  2. They are using good observation skills to mirror back to the subject what is palpably obvious.
  3. They are relatively vague in their predictions – which could be interpreted in a number of ways.

Transferring that analysis of tarot card reading to our practise of annually looking into a crystal ball, and making readings for the year ahead, meant that making our predictions for the 2020 South Auckland Industrial property market is a relatively simple task.

HISTORY: What happened last year will continue to happen in 2020. Last year was a tight market with minimal vacancy, and there are no signs this year will be different. Leasing, particularly of units sub 1000 m2, slowed up during the second half of 2019, and that trend is set to continue. Affordability of rentals started to become a problem for some tenants, and with the escalation of rental rates, that is likely to continue.

Bank lending tightened during the second half of 2019. The concern with regard to banks is however not that their lending has become more selective, but that their processes have slowed significantly. We agree with the case that banks need to manage their risk carefully. But if they are going to say “no”, then say “no”. Don’t stretch out the time it takes to reach that conclusion. Whereas 10 working days for finance on a deal would have been ample 12 months ago, even the most prepared application now will require 15 working days – and often longer.

OBSERVATION: There is still an excess of money looking for a home. That observation applies globally as well as locally, and with a forecast of continuing low interest rates, industrial property offers an attractive investment proposition. Often that proposition is defensive. It is not that investors are clamouring for industrial property, but more that they need a home for their money, and industrial property is an investment class which offers better, and possibly perceived as safer, returns than other classes. Whilst that means that we are likely to see more transactions at sub 5% yields, it comes with the caveat that buyers are also much more conscious of dotting i’s and crossing t’s. As buyers are often coming from other investment classes, ensuring documentation (everything from LIM to IEP to asbestos reports) is in order. And the impact of this emphasis  on detail is often to see both a slowing in the process of transaction, but also an increasing spread in yields between prime and secondary properties.

PREDICTION: This year the crystal ball’s view of the year ahead says much the same as last year – more of the same – and that any likely disruption will come from external events. Although there is a general election in New Zealand later in the year, the times when the markets stopped dead for six weeks ahead of the election are now long gone. We all know that in general terms, whichever bunch sits on the Treasury benches doesn’t make a massive amount of difference. There will always be certain loose units who are given more opportunity to make mischief and waste our taxpayers dollars than they deserve, but we retain confidence that the system is robust enough to rein them in – eventually.

We anticipate a flat market in terms of yields, rents and prices. The increases of the last few years are not sustainable in the short term as we need to be ever aware of the impact of rental growth on tenants. But nevertheless, strong demand for investment stock will continue.

In short, the year ahead is likely to be similar to the year just gone – barring unpredictable external events.

Obvious changes are likely to be a slowing in both property price increases and rental growth, and a greater spread in yields between prime and secondary.

And for the wildcard prediction: Watch for much greater scrutiny of tenants, caused by insurance companies taking increased interest in tenant occupations and risk. Certain business types will find it difficult to even get cover.

And now our crystal ball can go into hibernation for another 12 months.