Sir Bob Jones writes:
We’ve undoubtedly had our best ever year with rents soaring in Auckland, Wellington and Sydney, far beyond expectation.
Also, we’re bowling along nicely in Glasgow but, unfortunately, the city has become a hot destination, with foreign buyer commercial property acquisitions up 700% plus over the previous year. The city is doing well as reflected by residential prices, rising the most across Britain last year, up 12% compared with an average fall of 4% across England.
We’ve acquired two more Glasgow buildings during the year, finally got construction about to start on the building we’re knocking up in Wellington and a side high-light, our new fresh-from-the-factory bigger jet was finally delivered late last year.
Now we need an economic downturn so as to open new offices and acquire new stock at panicky seller rates.
We work to a formula, best described as countercyclical.
I’m of course retired from day-to-day involvement, other than with aesthetic concerns which we place a big emphasis on.
Greg [Loveridge] said he fielded a call from a big player in Sydney as to whether we’d consider selling the portfolio for a billion New Zealand dollars, my estimation actually of its net value after debt, but far too light anyway.
But we would never sell as we’d only have to start all over again, so what’s the point?
Also, commercial property is not like the sharemarket. We would never sell our buildings as you cannot actually replace them on their particular locations.
Of course it’s not just us who have had a great year. It has been a stellar market for all prime CBD buildings and also industrial, basically everywhere.
What of the future?
Inevitably the boom must stop. To a large extent it’s been singularly attributable to the global liquidity hangover arising from central bank stimulation. So the main beneficial effect has been felt by the commercial property and sharemarkets.
But there’s “something” in the air. Commercial agents in New Zealand say an eerie quietness has come over the investment markets, so too with the Auckland and Wellington residential markets.
So, when it comes to predictions, I suppose one could say, based on past experiences, expect the unexpected. We’re certainly well (ludicrously so at present) cashed up to exploit an economic crash. But to repeat; I’m a huge believer in the share-market adage that this time is never different.
The logical rise and fall of market economies, without which pattern they’re not working properly, must see a decline, the degree of which varying from place to place, in the near future.
Timing is everything
Following the 1987 sharemarket crash, the delayed aftershock for the commercial property markets in Britain, Canada, Australia, the US, and of course here, didn’t really bite until 1990, and my, how it bit then.
There were two reasons for that. First commercial leases maintained the status quo for a few years until their expiry.
But more salient, the craziness of bank lending to developers came home as so many of the office buildings here and in Australia and Canada in particular, were totally speculative, were duly finished and the developers went bankrupt as there were no tenants.
The buildings were fire-saled to an extreme degree, meaning as existing leases on buildings expired, lessees had on offer disastrously low rentals. It took a decade to restore a supply/demand balance.
When the 2008 banking crash struck we were delighted as we were aware of a lot of speculative new buildings being planned, which were abandoned. The timing could not have been better, and the commercial property market sailed through relatively unscathed.
Finally, there are only a few meaningful speculative office buildings on the drawing boards, or more significantly, actually under way. Thus, an economic downturn now would not have any significant effect, more so given the full-house scenario in Wellington and Auckland CBDs.
You may recall I once wrote about the excellent Reserve Bank study of how, worldwide, normal cyclical economic downturns have been turned into financial crises, solely through irresponsible bank lending to speculative developers.
That possibility exists here now but it’s the high-rise Auckland residential market excesses that lie at the root of this. BNZ has been a principal funder and could take a hammering.
On an entirely different note, I bought my first commercial building in 1963 and thus got into commercial property. It was a great decade up until about 1968-69 when the wool price collapse caused a crash.
But the commercial investment property business was protected by the then new finance minister Rob Muldoon introducing building controls, thus preventing speculative construction, a wonderful thing for existing investors as rentals duly surged through short supply.
Then again at the end of the 1970s decade came another unforeseen down-turn.
So too with the 1980s and the sharemarket crash and then at the end of the 1990s, the Asian banking crisis followed by the booming speculative tech stock market crash.
Then came the 2008 banking crash.
So history says, for reasons never foreseen, that the end of each decade sees a downturn or collapse.
And, as you know, “this time is different” has never applied.
Photo: New Zealand Herald/newspix.co.nz