The election effect

The election effect

Total Property - Issue 6 2017

Do elections have much of an effect on our commercial property market?

General elections roll around quickly in New Zealand, given our short three-year cycle, and generate considerable conjecture about their impact on the property market.

The common perception is that property activity slows in an election year. But is this really the case? A recently released Bayleys Research report shows residential sales don’t exhibit the drop-off widely believed to occur in the lead-up to an election.

An analysis of the five elections held since 2000 shows little variance between sales in the election quarter compared to the pre-election quarter in most election years. The 2011 election showed the biggest variance, but this was actually a rise of 7.1 per cent in sales during the election quarter from the previous quarter.

Lower turnover means there is no similar research on the commercial property market, so what can we surmise?

There was a drop in sales activity in the first five months of this year compared with the same period in 2016. But you’d be drawing a long bow to suggest that had anything to do with the forthcoming election.

As previously flagged, and reinforced by Property Institute chief executive Ashley Church in this issue’s election editorial feature, the decrease in sales has had more to do with banking sector constraints on access to finance.

There have been other factors at play as well. The past few years have seen year after year of record sales activity, which wasn’t sustainable longer term. The market was bound to take a “breather” at some stage.

There has also been a shortage of good-quality listings being taken to market. Finally, a perception that the commercial property market is close to the peak of its current cycle has made buyers more cautious.

Interestingly enough, though, the market is now showing signs of perking up again, with both the value and volume of sales showing an improvement in June and July. Perhaps most encouraging has been the increase in $5 million-plus sales, given that they generally entail a significant amount of leveraging.

Bayleys agents recently negotiated a $36 million-plus industrial sale in Auckland, a large provincial industrial sale for $20 million-plus, and the biggest industrial land sale in the Tauriko business estate, Tauranga, for just over $12.5 million. Bayleys has also been involved in the sales of two central Auckland office buildings, for close to $19 million and $141 million respectively.

Some of this increased activity could be the result of pre-election positioning. Recent polling suggests that neither a National nor a Labour/Green coalition may end up with enough seats to form a government and that NZ First, and in particular Winston Peters, will end up as “kingmaker”.

In a worst case scenario, it could take several weeks, even months, for a coalition government to be formed. Investment markets don’t like that sort of uncertainty. It is therefore not surprising that more vendors are putting their properties up for sale and that some are prepared to accept offers that they may not have taken a few months ago.

The general election was certainly “top of mind” in a recent sentiment survey of commercial property owners and tenants by Bayleys Research. The survey results (constructed from more than 5,000 responses) showed that the most commonly mentioned topic to keep well-informed about was the September 23 election, which has created some cautiousness amongst both tenants and owners.

The survey highlighted that some tenants were adopting a “wait-and-see approach” until the election before embarking on expansion plans or committing to new long-term leases. Certainty in business conditions was noted as a necessity, and the election provided a degree of hesitancy about their next steps.

Are there any significant differences between the policies of the two main parties that will impact on the commercial property investment sector? While Labour appears to have retreated from the comprehensive capital gains tax that didn’t help its cause in the last election, it is advocating an extension of the current “bright line test” from two years to five. This would require investors to pay tax on any capital gain arising from the sale of an investment property within five years of purchasing it.

Labour’s tax policy also includes proposals to close what it describes as a loophole allowing investors to write off losses made on their rental properties against other sources of income. However, this is more likely to impact on negatively geared residential property investors. Labour’s economic policies are also generally regarded as likely to be more inflationary than National’s, which may push up interest rates – and hence commercial property yields – faster.

Of most importance to commercial property owners will be a continuation of the good level of economic growth that has served the sector well in recent years. This is what fills up buildings and puts upward pressure on rentals and property values. We’ll let you be the judge of which party you think is most likely to deliver that outcome.

In the meantime, our latest Total Property portfolio offers plenty of options for investors, owner occupiers and developers. We look forward to being of assistance.

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