When is the best time to sell?
May 2017
If you own a commercial or industrial property and have owned it for some time, you may be contemplating selling. In general, owners have plenty of time to weigh up the options before selling.
Reasons for selling include:
- Change in personal circumstances
- Yield chasing/Interest rate changes
- Short term Weighted Average Lease Term (WALT) - 2-3 years before leases expire owner may not want to go through hasstle of finding new tenants
- Technical & Economic changes impacting tenant quality - eg Video stores, gaming arcades, retail, banking
- New Building Standards (NBS) - Sell to avoid costly strengthening program
- Avoid rebuilding
- Changes in insurance cover and costs
- Increased financing costs and deposit rates
- Changes in portfolio mix e.g., sell several buildings to reinvest into a single property
- Property management hassles
It's all about timing.
Anecdotal evidence suggests traditional investment property owners will retain their properties until risk adjusted annual returns from alternative investments encourages them to sell their property.
Perhaps the greatest influence on the time to sell in the current market is the prevailing interest rates on both the financing and deposit side. As it happens the decison by owners has been a resounding "not selling" decision because the interest rates have been low, encouraging buyers to bid up prices of commercial and industrial properties while most property owners remain sitting on their investments.
So when will be the right time to sell?
Arguably we have seen the bottom of the interest rate cycle and we are now seeing local interest rates increasing because international rates are going up. According to NBR, writer, Jonathan Underhill, banks are offering an average of 3.51% interest on a two-year term deposit, up from 3.3% in early November 2016. The yield on 10-year NZ Government bonds has surged almost 70 basis points to about 3.48%.
These interest rate changes are closing the yield gap with investment property.
In an ODT article by Dene Mackenzie (4 Jan 2017) Damian Foster of Forsyth Barr mentions he does not expect an expansion of PE ratios on the NZX but rather share appreciation will be a function of improved earnings per share. EPS for the market is estimated at 7.5% for 2017 and 6.5% for 2018. That growth was still robust but could moderate if credit tightens, he said. His picks for the next 12 months are growth over yield with no listed property stocks in his line up.
There is no doubt that those selling in this market are achieving exception prices with buyers bidding yields to under 6% (Christchurch) in many cases. And buyers are happy too because they have a risk adjusted return.
It is likely that it will take an external economic event to trigger a rethink on commercial property investment. Until that correction we may still see investment returns at the current low levels as those who have unsuccessfully tried to buy miss out again. I call it "buyer fatigue" and to overcome it buyers either need to withdraw from the market or make the highest bid.
Call Jeremy (0276 555647) today to share your own insights.
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