Olly Newland: Shaky foundations

Gated communities may become more popular. Photo / NZ Herald

Against the backdrop of a deepening global recession, no one can say how long it will be before "normality" returns. We are told this is shaping up to be the deepest recession since the Great Depression and we should expect flow-on effects to the world economy.

Property investors and home owners must ask whether the property market as we know it will survive, or must it undergo a fundamental shift?

The next 10 years will likely see a tougher financial and credit environment. The reworking of the laissez-faire capitalist system which brought us to this point cannot be avoided.

The unprecedented bailouts by world governments and the collapse of household-name corporates demand and drive eye-watering changes.

I predict a major shift in how we assess a potential property investment, particularly commercial property.

Over the coming decade I foresee a permanent change in the investment environment and in different classes of property investment as we respond to the tougher financial order. Some types of investment that were considered "hot" will become white elephants.

One of the most likely changes to the property investment scene will be the imposition of new taxes. The means to introduce some taxes at the stroke of a pen already exists, through government regulation.

One of these is Stamp Duty, common overseas (notably Australia) as a means to impose taxes on big-ticket items. Transfer taxes such as Stamp Duty (currently set at zero but not actually abolished) are effectively a capital gains or wealth tax.

Stamp Duty was charged on all real estate transactions for many years. I predict this form of tax will be high on the agenda for politicians as they try to fill the Treasury vaults.

Some examples of property investments that could feel the long term effects of the recession and its aftermath are:

Petrol stations
For decades, these have been one of the most stable blue-chip investments. Long-term leases, bulletproof tenants, guaranteed customers and good locations.

Their weakness was always that they are specialised and relatively high-tech developments. Gas stations are costly to run and the profits on petrol sales are marginal at best.

The new economic order will likely force the giant petrol companies to divest themselves of their remaining company-owned outlets in favour of the more profitable business of bulk supply.

The gas station chains will be sold off to private owners, operating much like a family-run corner dairy.

Investors should either ease themselves out of this type of investment or make allowances for the inevitable downgrading in the quality of the tenant.

Banks Another class of blue-chip investment which is due for a shake-up. The recession, coupled with improvements in technology, will increasingly make many traditional bank premises redundant.

Already, several banks have sought to reduce their longer leases to shorter ones, giving them the option to quit expensive rentals more easily. Most trading banks see internet banking as their future and the need for impressive premises is being slowly replaced with simple outlets.

My advice is to ease out or only buy bank premises that can be easily converted to alternative uses.

Gated communities
I see the rise of security coming from the stresses of the recession. The most popular homes of the future are likely to revolve around spacious apartment living, gated streets and lock-up communities.

A freestanding home, open on all sides, made of paper-thin materials, will fall into disfavour. The days of the isolated lifestyle home or far-flung beach house are also numbered - except, of course, for the wealthy, who can afford the luxury of high walls and even greater security to protect them.

Property syndicates
The collapse of interest rates has had a profound effect on those who rely on income from interest on invested capital. The new rash of property syndicates promoting shares in commercial property is a predictable response.

I don't doubt syndicates will become popular in the years to come, as they promise high returns with minimum risk. But investors should be careful.

Selling your share of the syndicate is difficult; the managers will earn hefty fees for running the syndicate; the promoters will likely make a capital profit on the selling price into the syndicate; vacancies will occur and expenses arise - which can greatly diminish the promised returns.

Despite their traps, a properly structured property syndicate can provide a good, steady passive income for those who want to avoid the hassles of property management.

Olly Newland is a property investor and best-selling author of six books. Email your burning property questions to omn@ollynewland.co.nz.

BUYING LEAKY HOMES

Some leaky apartments are for sale at a fairly cheap price (about $180,000 for two bedrooms, including the cost of repairing the leaky parts) in a trendy part of Auckland. The cost of repair might go up, in which case a purchaser would have to pay more after buying the apartment. Would it be foolish to buy one, given they might be hard to sell on, even if fixed? Or could they be a good deal because they might be worth a lot more? Cathy

I believe it will be a very long time before people forget about the leaky homes scandal. If I am right, then even if the property is fixed and signed off, the suspicion will remain. You may indeed end up with a bargain in terms of outlay and return, but making a capital profit in the long run is very doubtful. Such a deal is highly speculative. You have been warned.

I'm interested in a property going to auction in a few weeks. It seems a waste of money to get a valuation and building inspection if the property sells to someone else. Can I put in a conditional offer before the auction, or should I just attend and put in a conditional offer if the property is passed in? Dave

One of the problems with auctions is that you can spend a lot of time and money on research beforehand and get nowhere. Making a conditional offer before an auction is almost never permitted, but after the auction, should it fail to sell, you have a much better chance. You can get pre-approval for a loan from your bank so you can bid at the auction.

I am living in the United Arab Emirates and will return to New Zealand to live next year. I will be visiting in July and August with the aim of purchasing property (not for an investment) or securing a home and land package. Is this the right time to buy, or should I wait until I return permanently next year? Michael

It's always the right time to buy a home. The rigorous analysis used to buy investment property is not suitable for buying a home. When buying a home some emotion is understandable, as you have to like it. The emotional input can vary the price paid. Investment property is quite different. It's pure business.

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