Downturn, Recession, Upturn and Boom are part of every economy and business activity and the Property sector is no exception.
Although the current recession has created nervousness in the market, we will definitely experience another boom soon, bringing fresh opportunities for growth and profitability.
Those with the best-laid plans for the worst of times will survive, while those who have gambled their fortunes with poor investment and management will face financial ruin.
We must learn from the past and be well prepared with buffers in place.
Every period of recession is different from its predecessor. I vividly remember the Recession of 1987, which began with the Stock Market crash on October 19, nicknamed, ‘Black Monday.’
Unemployment rose from 4.2% in September 1987 quarter to 7.5% in the June 1989 quarter.
Thereafter, we have had droughts, the Asian financial crisis (1997) and constant hike in oil prices to disturb the overall economy.
Property prices dropped by 50% and even more in some cases. People lost their life savings. It was a very ugly time for the property market.
If you are able to secure lines of credit during good times and remain patient, you will improve your ability to purchase a property below its market value during times of recession and economic downturn.
You should look out for some typical signs. These include an increasing number of lease boards on properties, longer time in leasing properties, falling rents and a general feeling of uneasiness in the market.
Property owners offer incentives such as rent-free holiday, contribution towards fit outs and other proposals to secure tenants.
The opposite happens during periods of boom.
Uncertainty unnerves
Since it is impossible to predict the beginning or end of recession or boom, it pays to be well prepared all the time. Successful businesses and property owners would have buffers and shock absorbers in place, distribute their loans across a number of banks and spread their risk.
Banks are prone to changing their lending criteria during recession, including insisting on lower LVR (Lower Value Ratio). This means you would be obliged to repay a part of the loan to meet their new lending rules.
You must keep your property well maintained at all times and ensure that the leases are properly documented.
Recession has the tendency to last long. Who had guessed that the Christchurch Earthquake would encourage the Reserve Bank of New Zealand to cut the Official Cash Rate (OCR)? Otherwise, we would now be experiencing a higher rate.
Petrol prices are again on the rise. Confidence plays an important role as businesses cut back staff, postpone leasing new space, generating another cyclic effect in the market. The demand of commercial and retail space suffers during periods of struggle.
Some economists say that the ongoing recession would be a long haul, while others believe that we will soon reach the trough. We need to repose confidence in our own ability and work hard to improve our economic prospects.
Mahesh Ranchhod is a Director of the Ranchhod Group of Companies based in Auckland. Phone: (09) 3031353 Mobile: 021525569
Email: m.ranchhod@xtra.co.nz Website: www.ranchhodgroup.com
The Group incorporates New Zealand and Australian Companies and Trusts designed to invest in commercial properties and manage them in Australia and New Zealand.
