KEY POINTS:
Stresses across the New Zealand finance sector are providing challenges for some areas of the commercial property market.
"Investors who worry there will be more finance company collapses and who believe the United States sub-prime mortgage market crisis has not peaked, are turning to traditional trading banks and
the commercial and industrial property markets as a safe haven for their funds," says Colliers International metro sales manager John Davies.
Davies says the real issue with a feared credit crunch is not with non-performing loans but with a crisis in confidence and tightening lending criteria across the board.
He says the credit squeeze has undoubtedly hit some developers involved in riskier projects and there is some negativity creeping into the property market, but this doesn't correlate with the sector's fundamentals. Commercial property investment, per se, is no riskier than it was a couple of months ago.
The commercial property market is robust. Business confidence is still high, with companies riding on the back of a solid economy.
"Unlike the property crash of the early 1990s, most businesses are not facing liquidity problems. Companies are paying their rent, are profitable, hiring staff and are generally optimistic," Davies says.
"There is also a general expectation from economists that the Government will take the brakes off fiscal policy next year in the lead-up to the election. Combined with at least a decade's spending on infrastructure projects around the country, there are positive indications for growth in the economy."
Industrial broker Andrew Hooper says there is big demand for skilled labour from employers. Businesses are aware they still need to invest in order to boost productivity and this leads to new premises or expansion of existing properties.
Although a minority of buyers have drifted away because they have a perception the commercial and industrial property market is going to drop, the serious players are still circling each other to pick off investments in the mid- to top-end of the sector. An increasing number of small investors are also dipping their toes in the market through direct property ownership or through syndicated funds.
Kevin Podmore, managing director of St Laurence Group, which manages $750 million of property across various portfolios, is just as optimistic about the property sector but says New Zealand will not be totally immune from a global credit crunch despite many commentators saying the country is somewhat insulated because of booming export commodity prices.
Realised losses from the collapse of finance companies are expected to be around $300 million-$400 million or about 0.2 per cent of GDP. While finance companies' lending is a small pocket of total lending for the economy, it has been a significant source of growth in lending.
In the US, some experts are predicting there could be up to US$1 trillion ($1.34 trillion) of losses on sub-prime mortgages, about 0.7 per cent of GDP, but this will take months to confirm as the complex legal packages they are financing are unravelled.
Podmore says the problems threatening to topple the US into a financial crisis have already hit Britain and are expected to trickle down to other economies.
The global issues arising from the sub-prime mortgage market collapse mean the cost of money will become more expensive, says Podmore. Our trading banks are owned overseas and borrow their money overseas. Lender margins are expected to increase and that affects the viability of some property related investing, mainly apartment developments.
The National Bank's weekly Market Focus says this probably signals the end of the recent period of exceptional risk appetites and cheap credit, as opposed to a more fundamental shift in underlying macroeconomic conditions or an end to the availability of credit itself.
Peter Herdson, Colliers International commercial sales director, says if there isn't a restoration of investor confidence the credit crunch will last longer than anticipated.
It will be a tragedy because most local financial institutions have good assets, don't have bad loans and are well managed. It's just that there is a dearth of information on where the risk for investors lies and whether the returns are worth the risk.
Podmore says the sector needs to practise better disclosure and if the present crisis leads to a better understanding of risk and return, then that is a positive.
Herdson says the real danger lies in the negative sentiment swamping the finance industry, affecting the property market.
Finance companies are essential for funding a swathe of activities, such as property developments where the risk profile is too high for traditional banks. With the credit squeeze creating uncertainty globally, property is becoming a more attractive home for investment money.
Hooper says quality properties are still in high demand by local and overseas investors and he has seen little change in the level of interest when these properties come on to the market.
Rental growth in well-designed and built properties, with strong tenants in good locations, is continuing to underpin their value.
Properties lacking sound fundamentals, where there is little demand, could drop in value.
Across its portfolios, St Laurence is focusing on adding value to its existing properties through new design builds on vacant land and adding one or two storeys to buildings that are under-developed.
"Now is the time of opportunity for the finance sector," Podmore says. "The issue is not whether St Laurence will survive but whether it will thrive. To thrive, we need access to additional funds. It's going to be challenging and we need to come up with new products and this may involve some of our funds."
Nearly 40 per cent of St Laurence Group's business is in funds management. Although it is facing testing times, St Laurence Group has had new funds deposited and reinvestment from existing clients, but the quantum has dropped, as it has across the entire industry.
St Laurence has been running road shows for its 18,000 investors around the country and Podmore says they are clearly concerned but not panicked.
It is important finance companies rebuild confidence by showing exactly what the position with their clients funds is. That is top of investors' minds.
