Our view of the marketketplace

There is no doubt that we are in a changing markeplace. Whilst some of the problems are of our own making, especially in the finance industry, the repercussions from the US sub-prime mortgage debacle are not. Yet they illustrate once again that we live in a global village, and that stupidity and greed on the other side of the planet can cause problems for those far away and unconnected.

Already we are seeing banks, who nine months ago were very anxious to buy clients with generous funding deals, have now flipped to being ultra-cautious. Neither position made a lot of sense, which makes the words of Mark Twain even more pertinent : "A banker is the person who lends you his umbrella when the sun is shining and wants it back the minute it rains ".

There had obviously arisen a disconnect between property yields and the returns available from bank deposits. We see something of a correction arising, as interest rates seem unlikely to decline for some time - in New Zealand at least. Why would an investor tie up funds in a building at 8% (which is before management costs) when they can obtain 9% plus in a major bank ? Traditionally the offset was the potential capital gain from the property. In a stagnant market there is less likely to be significant capital gain, which should in theory see less of a gap between the two. We believe this is starting to occur, with sales of properties producing yields under 8.5% the exception now rather than the norm.

As a part of this correction we expect to see some sensibility come back into the market in discriminating between quality investments and income producing properties. We hesitate to call some of the third rate properties with difficult tenants on dubious or non-existent leases "investments" . Yet over recent years there have been properties in this category touted at yields not too distant from the yields appropriate to well located, well maintained properties with good tenants on long leases.

Markets that go up too dramatically inevitably correct. The positive we hope to see out of the coming correction is some sense of discrimination restored between quality and junk. Just as not all finance companies are shonky, so too not all tenanted properties are good investments.

A trip back to understanding of basics would be a welcome product of a market correction.