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Issue 6 - August 2011
 Welcome to the much-delayed Autumn/Winter edition of our newsletter. This edition was due to go to press the day after the February 22 quake, and, as we all know, so much has happened here in Christchurch since then.
Like everyone else here, the quakes have affected the whole Cowdy and Co team in different and sometimes tragic ways, but we are very proud to say that we’re still here, and we’re not going anywhere.
Despite the devastation, I’m pleased to report that all is not lost for the property market here in Christchurch. Far from it, in fact.
The residential rental market has been strong, with vacancy rates low; the residential property sales market is only hindered by the acute shortage of comparatively undamaged homes for sale; and the commercial market is only hampered by the availability of space.
As I write this, consideration is being given to the Government’s announcement that it will buy out any insured homes and land within the newly created ‘Red Zone’, and will put a further 9,000 homeowners on notice that it is still examining the viability of the land their homes are on.
This means that the number of houses lost due to the earthquake could be as great as 15,000 in Christchurch, which is heading up towards 10% of all houses in the city. Of course, a number of these homeowners will leave Christchurch, but the majority will stay – because of Cantabrian loyalty, their job, their home or their family.
Last year the Real Estate Institute reported that 6,632 houses were sold in Christchurch. Of the potentially 15,000 homeless, let’s assume 1,500 of these house buyers leave for other, less shaky climes. Just imagine what will happen when 13,500 extra house buyers enter the market – it’s quite daunting, really.
Obviously these new buyers won’t all be entering the market at the same time, because of delays in insurance payouts, etc. Instead, this will happen gradually over a much longer period.
Rents will go up as a result of scarcity, and structurally undamaged houses will be what landlords and owner-occupiers will want to buy.
So, here’s my advice:
- If you are buying and selling in the same market in Christchurch, then proceed. Presently, we have many more buyers than sellers and we are achieving some great results within very short marketing periods.
- If you are selling up to go overseas, proceed with urgency while our dollar is very strong.
- If you are planning to move out of Christchurch immediately, I recommend selling now because nationally the property market cycle can’t be regarded as strong, but I would suggest there is generally a strong property market here. The June QV report (issued in July) says that, nationally, values are 5.2% lower than the 2007 peak and 0.9% lower than 12 months ago.
- If you’re not sure whether your move will work out, I suggest you rent your property out until later this year, review the market then and be prepared to rent wherever you resettle.
Taking the above scenarios into account, I believe there will be more upturns in Christchurch property values than you can expect elsewhere.
I wouldn’t be surprised if we got a 5-10% lift in property values in the short to medium term. We are already seeing a run of near-new properties priced in the $1-$2 million bracket in the Merivale and Fendalton areas.
These buyers are wealthy purchasers who have red stickered apartments and hill homes. It’s not hard for these astute business people to anticipate that building prices in the top end of the market will also increase and that a new build will take at least 18 months, so buying a quality near-new home is cheaper and more immediate.
This type of buyer can be expected to feed the upper end of the market for some time.
Residential investors are also eyeing up the market as they anticipate rent increases in a lower interest rate environment. Investors will be return-driven and will exert buyer pressure at the lower end of the market.
And of course, it’s not just about residential property. Right now, we are seeing huge and sustained pressure on low-rise commercial offices, as businesses start making more permanent arrangements. See inside for much more on the commercial market.
It’s been a hard nine months for all of us, but we’re a tough bunch in Canterbury. I’m very proud to live and work alongside you all.
Regards,
Andrew Cowdy
AREINZ | DIRECTOR
Property Management Update
It’s hard to believe we are five months on from the February quake. This is my second attempt at writing this article, because the 13 June quake hit when I was writing the first version! It hardly seems believable that it’s been almost a year since September, when you consider how much has happened and how many changes we’ve seen to all our lives.
The level of activity in the rental market – of people searching for properties – varies significantly from week to week. Currently, Trademe has 1,155 properties listed for rent in Christchurch, so there is no shortage.
After the initial flurry of late February and March, when people were forced to find alternative accommodation, we are now seeing a more planned approach to securing another property.
This may be due to insurance payments being limited under some policies, and also the delays we are all experiencing to get to the repair stage, after EQC, engineers, surveyors, architects, loss adjusters and insurance companies gather all the information for the builders or contractors to be in a position to quote.
Then there are all the other people (those in the orange and white zones), who still have not had a resolution on the status of their land and are waiting for the Government assistance package process to finish.
We are seeing a high demand for the better properties – those that tick all the boxes – undamaged, warm, modern, double garage, desirable location and in the north-west areas. These sorts of properties are getting snapped up very quickly from our register of families and professionals waiting for quality executive homes.
I believe the demand for rentals will come in waves as the rebuilding work starts to happen. Many people will need to be relocated for 12-18 months if they are rebuilding their homes, and there will be a lot of demand for short-term rentals (6-8 weeks, for example); landlords will need to be flexible to accommodate these unusual renting arrangements.
We’re all working hard to cope with so many changes and I think flexibility will be the key to surviving the rebuild.
Residential Investment Update
Earthquake insurance settlements pack a hidden punch
Recent media reports have indicated that many property investors and landlords are unaware of a tax rule attached to insurance settlements for damaged buildings or chattels.
In light of our recent earthquake, I would like to explain, ‘in layman’s terms’, how this will affect you if your property has sustained damage and required an insurance claim.
Over the past few years, you have probably been claiming depreciation on your investment property and chattels as a tax write-off through the IRD. However, if you have claimed insurance on these items as a result of the earthquake, you may be liable to repay those depreciation costs to the IRD.
Private homeowners are not affected by this payback rule, only commercial and residential landlords. And if you are a commercial landlord there could also be additional GST implications.
If you would like to talk about how this is going to affect you, we recommend you make contact with your accountant or tax agent.
As a property investor, how does an insurance payout affect my income tax return?
This will depend on the purpose of the insurance policy and how it relates to your investment. Here are some examples, courtesy of www.ird.govt.nz:
Irreparable damage to business assets – If you have received an insurance payment for irreparable damage to property that is depreciable, the IRD will treat it as if that property has been sold.
If you received more than the adjusted Book Value of your asset, you will need to include in your income tax return the difference between the insurance payment and the Book Value, up to a maximum of the total accumulated depreciation claimed to date.
Capital assets – If your insurance payment replaced or reimbursed the cost of capital assets, you do not need to include these in your income tax return; that is, if the insurance proceeds are applied to reinstating the damaged property, these proceeds are not classified as income.
However, if any repairs to your capital assets are claimed in your income tax return, you will need to include the amount of the insurance payment as income.
Other assets/revenue assets – If the insurance payment you received was to cover revenue expenses, for example, loss of profit insurance or business interruption insurance, you will need to include this as income.
Apportionment – If you receive a lump sum covering several claims, you will need to allocate the right amount to each claim to work out whether it relates to capital assets and revenue assets.
Compensation for loss of land – If you receive compensation for the loss of land (whether in the form of a cash payment or land swap), this will more than likely be a capital expense. However, if your business deals in property, subdivisions or land developments and you hold land on revenue account, any compensation will need to be included as income in your income tax return.
Visit www.ird.govt.nz for online information.
Commercial Property Update
Building Codes: High Stakes
In terms of magnitude, the 6.3 earthquake of February this year was just a moderate earthquake. But the local effects in Christchurch have been huge because of its proximity and shallowness.
New Zealand is seen internationally as having very stringent building codes; however, thought has only been given to earthquake issues from around 1965 and there have been various upgrades in the code in 1976, 1984 and 1992. After September this year, some building owners will be required to strengthen to 67%. That action was clearly taken to preserve lives, not just property.
But some insurers have flatly refused to pay for strengthening work.
In the past, some building owners have sought to strengthen their buildings by the absolute minimum, or not at all, when embarking on refurbishment or change of use.
The 4 September quake hardened the Council’s resolve and the aftermath of 22 February will harden that resolve even further.
The legal position of owners and their insurers looking at having to strengthen partly destroyed buildings is yet to be tested in our Courts. Australian cases may assist in deciding whether it is the building owners or the insurance companies that have to fund additional repairs to bring buildings up to any new code.
In New South Wales, it was found that it was the duty of the insurer to pay the cost of an actual, as opposed to a notional, reinstatement. If this meant compliance with a new statutory code, the insurance company was required to meet that cost.
The insurer is at risk in a replacement policy in respect of the costs of complying with any codes which came into force during the currency of the policy. Reinstatement to the new code at the insurer’s expense was deemed to be reasonable.
The Australian cases may be persuasive in New Zealand. An insurer adopting the position of a blanket refusal to pay for strengthening costs to either 33% or 67% would seem to be unsustainable. Building owners should review their policies with care in the light of their own situation.
The strengthening debate has very serious implications in respect to potential loss of life. Expect the building code to become even tougher.
Written by Geoff Saunders - senior commercial partner at Saunders Robinson Brown Lawyers, Christchurch.
Meet the Commercial Team: Craig Thiele
We are delighted to welcome Craig to our Commercial Team here at Cowdy and Co. For anyone familiar with the commercial property market here in Canterbury, Craig arguably needs no introduction, given the fact that he has worked in real estate since 1975, when he joined Livingstone Jones Lang Wootton Christchurch.
Although Craig’s career started out in residential sales, he moved to commercial sales and leasing in 1985 and his vast experience is something we’ve been very pleased to add to our team.
Craig’s experience with project managing and marketing of residential and land sub-divisions, together with central city office and retail leasing, is so impressive that he has earned the marketing nickname ‘The Spaceman’.
Also experienced in debt recovery for commercial companies and banks, Craig’s knowledge of all aspects of the industry is well known and his opinion is widely valued and trusted.
“I enjoy doing deals and I enjoy adding value,” explains Craig. “It’s pretty simple really. It’s a fun business because you get to meet all sorts of interesting people. I enjoy the smaller jobs as much as the big ones. It’s just a nice business to be in.”
Craig is also a talented auctioneer and successful project marketing specialist. If you’re looking to lease, buy or sell commercial property in Christchurch, you should definitely give Craig a call. He really knows his stuff.
Ph: 03 355 6555
Cell: 0274 323 011
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Why farming is better than banking
I recently stumbled across this very interesting article in Time magazine about the farming boom in the USA. The article is entitled ‘Want to get rich? Be a farmer’ – although American data is used to back the story up, it’s clear the same situation would apply here.
The article, published in the 11 July 2011 edition of Time, suggests that banking experts and economists have discovered that investing in farms is garnering much higher returns than the traditional investment channels, and farming is becoming big business in the States.
It’s becoming big business here too. The blindingly obvious example is the rise and rise of dairy farms as we struggle to meet the huge international demand for dairy products.
Time’s journalist spoke to Jim Rogers, investment whiz, best-selling author and one of Wall Street’s towering personalities. He had this advice: “Become a farmer.”
In the article, Rogers predicts that farming incomes will rise dramatically in the next few decades, faster than those in most other industries — even Wall Street. The essence of his argument is this: We don’t need more bankers. What we need are more farmers. The invisible hand will do its magic.
“The world has got a serious food problem,” says Rogers. “The only real way to solve it is to draw more people back to agriculture.”
The article states that, according to the Federal Reserve Bank in the USA, the average farm has doubled in value in the past six years. Farmland is quickly emerging as one of the year’s hottest investments on Wall Street.
“We’ve been doing this for a number of years, long before anyone thought this was sexy,” says Jeff Conrad, who heads Hancock Agricultural Investment Group. “Now we are getting a lot of calls, and we are noticing more competition. There’s a lot of interest in New York.”
So if farming is the investment to be looking at hard for the next couple of years, Canterbury really has something going for it: we’re great farmers here. And we’ve got a lot of good land to farm on.
Cowdy and Co has a growing presence in the rural property market and it’s getting bigger all the time. We’re getting a lot of calls and there’s definitely been an increase in interest in the rural sector. If you’d like to know more, please don’t hesitate to give me a call.
Trevor Wright, Rural Specialist
P. 021 212 1277
E.
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Here’s a link to the article if you’re keen to read it in full: http://ti.me/jgfuhB
Air Asia X + Tourists = A Timely Repair For The Region’s Economy
The recent launch of AirAsia X’s direct flights from Christchurch will see the region’s tourism numbers increase dramatically, with an estimated 70,000 more visitors a year and an additional NZ$70-$80 million to the region’s economy.
The Malaysian-based airline has been flying from Kuala Lumpur to Christchurch four times a week since April.
As well as bringing tourists here from Malaysia, the introduction of AirAsia X will also encourage visitors from around New Zealand who wish to take advantage of the budget airfares and travel opportunities.
As Christchurch’s retail and hospitality infrastructure redevelops, we too will reap the benefits.
In the meantime, the South Island has much to offer tourists, with wine tasting in Marlborough, whale watching in Kaikoura, skiing and, of course, the adventure tourism capital, Queenstown and the Southern Lakes.
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