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Investments

And here’s one for Property Investors …..

As with any form of investment you need to plan and manage investment in property and understand what can influence the market and environment it operates in. No form of investment is totally passive which means you need to intervene in the process to get a reasonable return on your investment.

It is well known that investment in property, as opposed to trading in property, is a medium to long term investment and this is also recognised in tax law applying to dealings in land transactions i.e. the duration over which property is held.

In today’s property investment market in NZ there are even more things to take into consideration in managing one’s investment than there were in the past. This is because we live in a small and very open economy. We’re open to many of the financial and economic influences in the World.

Consider for a moment the following global and local events that have changed investment markets including the property investment market:

• the Global Financial Crisis (GFC) that commenced in 2007 and didn’t want to go away
• the collapse of overseas banks and finance companies including those in NZ
• economic stimulus by Governments to avoid recession including tax measures in NZ
• the rise of production and consumption in China and wealth of the middle class
• major fluctuations in global commodities markets
• major natural disasters and increasing cost of insurance over physical assets
• significant declines in the sharemarket in China and the effect on other major sharemarkets

These events and others brought about by them changed both the drivers and responders in investment markets and the property investment market did not escape the collateral effect.

So what can property investors take from these events that can affect the property investment cycle and fundamentals as we once understood to be; what lessons can be learnt and what needs to be taken into consideration going forward to manage ones investment portfolio.

Helpful Hints
You will need to understand what drives the market and what will affect the result of your investments. Here are the common key drivers you should take into consideration in managing your investment in property:

1. Supply and demand factors that drive property prices in the location of your investment.
2. Buy vs rent – what makes people decide to buy property as opposed to renting property e.g. mortgage rates, lending criteria, the availability of finance and the preference for asset ownership.
3. Higher building and maintenance costs. This can be driven by changes in building laws and regulations (e.g. building consent process) and the shortage of skilled tradesmen.
4. Immigration and the increase in migrants. What is the mix of those who are returning New Zealanders as opposed to those who are new migrants? What are the drivers of overseas migrants entering the property investment market? Do they have greater purchasing power than New Zealanders and will this affect property values in the location of your investment?
5. Demographics and location. These have a direct bearing on potential rental incomes which, in turn, will affect your return on investment.
6. Property values and the pace of movements. The drivers of value and its movements today are different to those of the past. In the past inflation was a key driver of property values. In a relatively low inflation environment today, the shortage in the supply of property has become a key driver.
7. Tax changes. The LAQC tax regime used to provided added incentive to invest in property but with it’s abolition and now a new form of capital gains tax on residential property, the game plan changes again.
8. Interest rates. As is usual interest rates and movements are driven by both global and local economic and cost factors. This is not expected to change except perhaps with advances in information technology the speed of change and response will accelerate.
9. Central bank regulations. The new LVR lending rules imposed on property financing introduced a new regulating tool for the Reserve Bank. This was recently followed by tighter lending rules for Auckland versus the rest of the country for reasons that is now common knowledge.
10. Initial capital investment i.e. the size of the owner’s investment in property, usually in the form of the initial deposit on the property purchase. The new Reserve Bank lending rules relate to this but so does the amount of funds overseas migrants can introduce from private overseas sources. This can tip the level playing field for property buyers in the market.
11. Rate of return considerations i.e. the risk-return fundamentals that apply to any form of investment and also the significance of the inflation rate that used to set a benchmark for the expected rate of return. Today, property investors need to use a new benchmark as inflation is very low.
12. Holding costs. Investors should factor this into the cost of their property investments taking into account investor’s opportunity costs.
13. Opportunity costs. This is the foregone return on alternative investments as opposed to investing ones money in property. In today’s investment risk-return environment this definitely needs to be factored into the investment process.
14. Tenancy and vacancy costs. It is prudent not to expect full tenancy over the period of investment so the investor should factor in tenancy breaks when there is no rental income.
15. Inflation. Following GFC and the global recession, inflation has been very low and is currently benign in NZ. The concern and challenge in some parts of the world now is deflation.
16. Diversification of your investment. The old investment rule of “don’t put all your eggs in one basket” is more valid today than ever considering the heightened risks with investments in today’s global economy.

Conclusion
To put your investment decisions to the test, you need to ask the following questions.

How have you been measuring the return on your property investment since you purchased them?

Are you using the right measure for gauging today’s property investment market and economic conditions?

How often do you apply the drivers mentioned above to regularly re-evaluate the performance of your investment?

What alternative forms of investments have you seriously considered given the quantum of money you have invested in and borrowed for property?

Have you considered diversifying your investment, and if not, why not?

The rules of the game have changed considerably so to be a winner you will need to change your investment strategies and manage your property investment more actively.