Seeking clarity through the Covid clouds
Here we are, just four months into 2020, with the world a completely different place to the one we started the year in. I recall first hearing about “coronavirus” on the breakfast news in late January when in Melbourne for the Australian Open tennis, after a couple of cases had been identified in New South Wales. Back then the threat of a global outbreak paled in comparison to the dominant news item at the time – the bush fires that ravaged through Australia. We wandered among hoards of tennis-goers and ventured into crowded bars and restaurants without a second thought.
Now as I type this from my makeshift home office in Hawke’s Bay (a.k.a. my son’s bedroom), January seems an age ago. Similarly, the predictions for the economy and property market made at the time seem a mile away. Even with Covid-19 starting to cause problems in China, ANZ’s quarterly economic outlook maintained a degree of cautious optimism for the year ahead, including for the New Zealand property market. Yet in just ten weeks we’ve seen borders closed, countries effectively shut down, government-imposed quarantine measures, a share market crash (and surprising rally), massive fiscal and monetary stimuli across the globe, and sadly a significant amount of illnesses and deaths. You would struggle to write a script quite as dramatic.
There’s an already overused phrase by the media on our current state of affairs – that these are “unprecedented times”. From an economic standpoint that phrase is far-fetched, but in a wider context it rings true for anyone from the baby-boomer generation onwards. Although we’ve been through economic crises before, nothing has physically stopped us like this. Our imposed confinement tugs away at what we in the western world have long considered essential human rights – to pretty much go where we want, when we want and by how we want. The sudden removal of these rights has left us a little dazed and confused, leaving us to process what it all means for each of us personally, for our businesses, community, schools and ultimately for society as a whole.
To what degree you subscribe to the seriousness of Covid-19, from an economic perspective - it is irrelevant. Perception is reality, and a tidal wave of reality has arrived on our shores. It is unavoidable that New Zealand, along with the rest of the world, will enter a severe recession. You can’t hit the stop button on all but the entire economy and expect anything different. The “stay-at-home” measures imposed by the government – no matter how short term – will have a significant financial impact on all of us going forward. They already have. Some business won’t survive – some have already succumbed. The property market won’t receive the vaccine we all remain hopeful for. The impact on property prices and sales may be less dramatic - a slower burn compared to equity markets - but it still promises to be deep.
Thus, the health of the business community and property market during and after Covid-19 will mimic that of the general population. Businesses with strong balance sheets, low gearing, strong management and governance will come through this. Some may continue to thrive and wonder what all the fuss was about. Conversely, businesses with signs of weakness leading into the lockdown are especially vulnerable and may need to spend a great deal of time in their bank’s intensive care unit - or may not survive at all. No treatment will come quickly enough.
Similarly, quality properties in good locations with appeal to a wide market will have some immunity from severe price corrections, while others will bear the brunt of the coming downturn. Traditional tourist hot-spots will be bracing for a quiet remainder of 2020 as the tap remains turned off for international visitors. The impact on jobs within the tourism and hospitality sectors will be severe, but whether this translates to an equivalent effect on property prices in those regions remains to be seen. Restaurant and hotel workers are probably not owners of million-dollar properties in Queenstown, but they will be tenants of those properties. If landlords feel the squeeze, then a correction will follow. Meanwhile, low bank interest rates and a strong dose of central government support will help maintain some buoyancy. As unprecedented as these times are, so too is the government’s care package – never before has something so significant been rolled out with such haste.
At Killarney Capital we are working closely with our existing clients to help see their property projects through to a successful outcome. We are all working from home during Levels 3 and 4 but remain the approachable and responsive team that we have always been. Many challenges lie ahead in the post-lockdown economy, but our ship is well equipped to sail through choppy seas.
With every downturn comes opportunity, and this downturn will prove no different. Killarney Capital will remain an active participant in the New Zealand property market as collectively we encounter the effects of Covid-19, through to the resulting recovery. We look forward to continuing to provide unique funding solutions for good quality property projects throughout the country.