Covid-19 has brought the property market to a screaming halt, throwing the expectations of many into disarray. After all, this year was supposed to see a return to form for the market - and the first few months of 2020 were fulfilling that promise, with both sales and price growth strengthening.

The lockdown turned all that round. Sales activity froze and the rental market came to a standstill. This caused problems for some investors, particularly in terms of rent payments. But the move out of lockdown to alert level three has provided some hope of a return to more normal times.

CoreLogic senior property economist Kelvin Davidson says real estate activity will start to recover again as the country moves back down through the alert levels over the coming months. “But the recession and rising unemployment rate both point to a much more subdued property market than otherwise would have been the case.”

In the months prior to lockdown, their buyer classification data showed that property investors had been providing lots of the momentum for sales volumes, he says. “However, as unemployment rises, rental returns may come under some pressure and it’ll be interesting to see if investors’ appetite for property can be sustained.”

This begs the question of how investors are weathering the Covid-19 storm, both to date and going forward. We’ve talked to a range of property-related experts to get the lowdown on how investors are dealing with the situation, along with some advice on how they should tackle the months ahead.

The Investor Advocate’s View

While the lockdown has meant a slowdown for many, that hasn’t been the case for the NZ Property Investors’ Federation. They’ve been on the ground getting feedback on how the lockdown is impacting on landlords.

That’s included conducting a survey to gauge the effects. The survey results showed that, at that point, 41% of landlords had not been affected by the lockdown, but 59% had lost all or some of their regular income from jobs, contracts or business.

NZPIF executive officer Sharon Cullwick says while many investors appear to be coping with the current situation, there will definitely be some who will hit the wall over the course of this. “But I think they will mainly be people with big interests in short-term rental properties and also people who have a mix of residential and commercial property.”

Overall, residential landlords are working with their tenants, she says. “If landlords can afford to help out their tenants, delay rental payments or a rental holiday, that’s great. But they face exactly the same challenges as tenants with job losses, business failures and difficult financial times – and they’re getting little relief.”

While the Government has introduced some minor changes to help landlords, in Cullwick’s view they are not adequate and ignore the expectation for landlords to financially help out their tenants at this time. A new temporary loss carry-back scheme specifically excludes residential rental property owners, for example.

One way the Government could help would be to delay the new rules around the ringfencing of rental losses until the 2021/22 year, she says. “This would give 300,000 rental property owners more flexibility to assist many of the 1,300,000 tenants in rental houses.”

‘We’ve been very pleasantly surprised by the goodwill of our landlords’ response to requests for rent reductions or deferred rent. They have been trying to help as much as they can’ DAVID PEARSE

The move to alert level three will assist landlords who were between tenants when lockdown started and want to fill the vacancy. It will also help out investors who are in the midst of doing repair or renovation work on their rental properties – as such work is possible at level three.

This will take some of the pressure off, Cullwick says. However, in many ways, it’s all overshadowed by the Government’s proposed tenancy law reforms which, despite the Covid-19 crisis, are currently going through the oral submissions stage at the select committee.

“If passed into legislation, it will make it extremely difficult to deal with problem tenants. That will be a major problem for landlords. In the meantime though, the best thing for landlords to do is to stay in touch with their tenants, to find out what their situation is and how they can work with them.”

The Property Manager’s View

Concerns about both the economic impact of Covid-19 and the Government’s proposed tenancy law reforms are widespread in the industry. Pukeko Rental Managers managing director David Pearse is another who points to the uncertainty that flows from both these issues hitting at the same time.

Pearse, who is also the Property Managers Institute president, says that, at this stage, no-one is rushing to put their property on the market, but it will be interesting to see what the situation is post-lockdown.

“That’s when we’ll learn the reality of what impact the loss of earnings and jobs, together with the growing move of Airbnb properties over to longer term accommodation for cash flow, will have. We are expecting that rental values may soften and landlords will need to be more sensitive to asking rents if the market goes flat for a period.”

It’s very much a “wait and see” situation, he says. “But with Covid-19, the immediate fears of the landlords we work with have been allayed by the fact that we have had very few tenants trying to take advantage of the situation. The majority of tenants have been good.

“Likewise, we’ve been very pleasantly surprised by the goodwill of our landlords’ response to requests for rent reductions or deferred rent. They have been trying to help as much as they can. Our focus has been to respond quickly to tenant concerns and advise them to get support from WINZ. Generally, this has worked well.”

In terms of property management, Pearse says they are using technology to work remotely, in line with the health and safety requirements under the various alert levels. That means obtaining applications, doing preliminary checks on prospective tenants and interviewing before showing a property.

Prospective tenants are interviewed via Zoom and only shortlisted tenants get to view properties. Additionally, they are conducting virtual video viewings to show prospective tenants what a property is like and have developed a method of carrying out property inspections by video.

“I suspect the days of taking anyone interested through the property is over and this may be the new normal. Most of the technology developed can be adopted post-Covid-19 and it will have a long-term effect on how we do property management.”

For landlords, constructive communication with tenants is key to getting through this, he says. “Going forward, it might be tough and some investors might have to reduce their portfolio.

“But property remains a great investment – everyone needs houses and values will go up again. So look at your situation, get financial advice and see how you can navigate the current situation. Hang in there: it will get better as time goes on.”

Nz Property Investor Survey: Covid-19 For Investors: Responses From The Frontline

In early March the housing market was breaking records again – but by the end of the month the country was in Covid-19 prompted lockdown. We haven’t been thrown a curveball so dramatic in living history, and the crisis and its aftermath is set to alter the direction of our economy for months (or years) to come.

The pandemic won’t leave the property market untouched. While economists and property experts all have their own take on the future of the market, we decided to ask investors on the frontline where they saw the market going and what they had done over
the lockdown period.

The results of our survey threw up some interesting insights. They showed that: 32% of landlords have lowered rents for struggling tenants; 13%Only 13% of property investors say they will have to sell some of their properties, with 33% saying they will look for opportunities to buy; 50% of property investors believe house prices will go down; 55% of property investors believe that rents will level out while 26% believe that they will go down.

While there was a significant level of concern from landlords around the investment environment over the next 12 months, it wasn’t just the Covid-19 pandemic that was worrying them.

In fact, the Government’s proposed changes to the Residential Tenancies Act – particularly the removal of the “no cause” notice and the requirement that fixed-term rentals roll over to a periodic tenancy when agreements end – are of more concern to many.

The following quote is indicative of the general sentiment:

“[It’s] going to become much, much harder for property investors, thanks to the war on landlords. There will be tonnes more tenants needing homes as a result of tonnes of investors wanting to sell now, but so many are shocking tenants. Tenant selection is going to be so difficult.”

An overwhelming percentage of respondents (72%) stated that they think conditions will become harder for property investors over the next 12 months. But with only 13% saying they will sell, it seems most landlords are committed to playing the long game.

“Airbnb is dead, [there’s will be] a massive increase in rental supply in Auckland. Business closures and unemployment will mean I will lose tenants and have to make massive rent reductions just to find tenants. If no rental income, may have to sell houses, but competing with other small business owners and investors having to sell rental properties, unfortunately looking at 20% reduction in prices we will get in South Auckland I suspect.”
- SURVEY RESPONDENT

“The only way my investment property may be affected is a possible permanent reduction in rent income. For the wider environment, those who can sustain owning a rental or rentals will have to realise incomes of tenants will generally be less. Those with a large portfolio are likely to have less reliable rent payments and will have to reduce rents whether they like it or not.” - SURVEY RESPONDENT

The Mortgage Adviser’s View

Navigating through the Covid-19 crisis successfully will also come down to not making rash decisions. Especially as the country moves away from lockdown and the true extent of the economic impact becomes evident.

That’s because there are a couple more crunch points to come, according to AdviceHQ founder David Green. “One will come when the wage subsidies run out after 12 weeks and another will come when the mortgage holidays end after six months. They are when the rubber will hit the ground and things could get much harder for many people.”

In his view, that means it is critical for investors to make sure they have a clear understanding of their financial situation. A good investor will have had a plan in place but it may be that that plan now has to change, he says.

“Don’t read too much into the more sensational media coverage and don’t make hasty decisions. Instead think about how and what you need to do to get through this and move forward. Work out the best approach for you and your portfolio in the current situation. Figure out who the best person to go to for help is and talk to them.”

Also, remember there are options for financial assistance out there. Alongside the “mortgage holidays” which Green (along with others) points out may not be the best choice to make, there’s moving to an interest-only loan, extending loan terms, and now there’s also the temporary removal of the LVRs.

‘If you don’t mind what happens and just go with the flow on a day to day basis, you won’t have an attachment to the outcome and so are less likely to make rash decisions’ GRAEME FOWLER

Green says the lifting of LVRs might help some people but banks will continue to use high serviceability criteria when assessing loans, particularly for borrowers with Covid-19 impacted income. “Most banks are also focusing on looking after their existing customers and they are not really looking for new deals.”

Another option though could be non-bank lenders. “About 40% of people declined by the main banks don’t know that there are other options out there. But there are and in this environment non-bank lenders can come to the fore and help people who are struggling.”

Mortgage advisers can really provide value here because of the relationships they have with the full spectrum of lenders, he adds. “Most advisers out there want to help people survive through this period and then thrive later. So don’t hit the panic button. Get a plan in place and talk to the people who can help.”

The Veteran Investor’s View

For serious long-term investors with a solid plan in place the reality is that, despite all the uncertainty, the current situation may not have much of an impact. In fact, legendary investor Graeme Fowler says that if you are a long-term investor, nothing much should change at all.

“Prices may fall and they may not, that doesn’t change your long-term outcome. Although if prices drop and rents stay around the same, then yields will be higher making property more attractive to investors once again as it will be easier to make the numbers work.”

But it’s cashflow that is the biggest thing for most people, he says. “If you are just managing to get by now with the properties you own as far as cashflow goes, having one or two tenants not being able to pay could be an issue. For those not using interest only now, this could be an option, or if they are already using interest only, a mortgage deferment for a few months may be the only option available.”

Having been through recessions before, Fowler advises that it’s important for investors to stick to the basics and keep their LVR at a manageable level.

That means the more debt you have, the lower you want to have your LVR, he says. “For example, if you have $1 million worth of property, a 60–70% LVR should be fairly safe. But if you have $20 million worth of property, it would be more prudent to have your LVR around the 35-40% level.”

One of the difficult components of the current environment is the uncertainty – and this can influence people’s decisions. Fowler says a lot of people operate out of fear of the unknown and make choices which later on they end up regretting.

“If you don’t mind what happens and just go with the flow on a day to day basis, you won’t have an attachment to the outcome and so are less likely to make rash decisions – like so many investors often do.”

He adds that for those people who are trading, sub-dividing or developing, the next few months may be a more of a wait-and-see approach rather than carrying on as normal. “Within three to four months, it should be easier to determine whether it’s a wise option or not to pursue these strategies again.”