At the Coal Face - Market Commentary from Adam Copland

It’s certainly hard to find anything positive in the financial markets and economic commentary right now, every page we turn has more data and more news about the impending economic doom we are facing. From our perspective in the commercial property sector we have considerable headwinds, primarily around interest rates at present, but it’s really important that we take a rational and considered approach to the situation and go back to the long term fundamentals of why we invest in property.

You may recall that only 12 months ago the economic commentary was all about interest rates being ‘lower for longer’ and potentially even going negative. The actual situation is that real interest costs have increased by over 4% in an 8 month period, the most aggressive interest rate increases in recent history. It must be the most forgiving job being an economist, you can get it completely wrong all of the time and still have your phone ring as a leader in the sector. For this reason we are taking the current economic forecasts from these leaders in the sector with a grain of salt. In our view, the suggestion that an impending recession will cause interest rates to reduce again relatively quickly is unlikely so we are preparing for a medium term period of higher interest rates followed by a slow period of lowering interest rates.

Property investment is a long term game and there are some things that we are confident won’t change:

· Interest rates have gone up, they will probably keep going up for a while but they will also come down at some point.

· Property yields to an extent will follow interest rates so they will go up (values will come down) then they will go down again (values will go up).

· Inflation will flow through into rental rates, the net rents we receive on our properties will increase which will assist in long term capital growth.

· Businesses will always need to occupy space, on the whole New Zealand is a desirable place to be and the population will keep growing so demand for property will continue.

· Investment in property during inflationary times has proved to be one of the best hedges we can take against inflation.

In terms of what we are seeing in the market presently, there is very little activity due to the economic situation so it's difficult to get a precise gauge on what is happening. The value of property has undoubtedly reduced but only the parties subjected to that reduction are those that need to sell and to date we have not seen a lot of pressure in the market place. We are still in the very early stages of this market cycle so we will watch with interest as this unfolds. We are confident there will be quality transactions and investment opportunities moving forward for those with the appetite to invest in an uncertain market and we will continue in our pursuit to find these opportunities.

If I can put one positive spin on the current situation, at least high inflation has the benefit of effectively eroding the value of debt. Throughout history Governments have used inflation as a way to lower the value of government debt when it becomes too high. The same principle applies to an investment in commercial property with a portion of debt, as the value of money reduces due to inflation the value of the debt reduces with it. So long as the value of the property goes up over time, which in theory it will as over time rent will increase in line with inflation, then the value of our debt is reducing. Provided we can continue to service our debt, the more we hold and the longer we hold it for, the more money we can make from it.