I am going to preface this article with the fact that right now I will struggle to tell you what the world is going to look like tomorrow. I am however going to give it my best shot on what some of the goings on in the world might mean for us as a country over the next 6 + months.
Please bear with me on this one – the first little bit is rather negative, but I do try to finish on a positive note!
Right now, the government is gearing up unlike anything we have seen before to support Kiwis through the shut down and beyond. Part of this process is providing a platform for banks to take riskier positions than they would have previously expanding their balance sheets and possibly placing further burden on those companies that get through this.
There will also be unsecured creditors balances that will extend through this period, people will simply be looking at what they can pay in the short term and not everyone will be getting fed. Trade terms are looking like they are going to balloon out for a number of businesses and recent proposed changes in the companies act will support some of this.
Loan holidays are in place for 6 months, debt leveraged in the short term under the Business Finance Guarantee scheme will no doubt be partially applied to servicing that debt in the short term until things ‘get back to normal’, the Business Debt Hibernation and Safe Harbour amendments to the Companies act provide 6 months relief and wage subsidies are there for 12 weeks (3 months) a recognition that the pain will extend beyond the lockdown. This doesn’t even include the government’s proposal to take on and support ‘Shovel Ready Projects’ that need to be out of the ground sometime over the next 6 months – this sounds eerily like a return of the Ministry of Works…
A lot of this could be classed as ‘kicking the can down the road’, effectively pushing these obligations out 6+ months but not necessarily solving the problems. There are a number of businesses and consumers in NZ that may get through the shut down by the skin of their teeth but likely end up on the road to a slow demoralising financial death with the increased obligations they take on through that period / slow recovery post.
The government looks set to take on a further c$20bn+ of debt lifting NZ’s obligations over USD$75bn (34% of GDP) which in itself isn’t unreasonable (Japan is sitting at 250%) however when coupled with NZ’s household debt (a further USD$195bn) takes us to c123% of GDP. This isn’t taking into account further debt in the private sector OR a fall in our GDP.
My pick in this space is that we will only really start to see the burden of this shut down period 9 - 12 months following it easing. Increased debt burdens will begin to weigh on our recovery as banks tighten their criteria and force the tightening of belts of the general public. The government will want to bring their debt levels back to more manageable levels (tax revenue is likely to fall remember). The chickens will be home to roost for the relief and leverage provided to ‘support’ businesses and public over the next little while.
9 months in we are likely to start to see some wider defaults on obligations and the knock on effects those entail.
I have mentioned before, tourism is going to be extremely badly punished through all of this. I expect our borders to remain closed or heavily restrictive for 12+ months as a global cure is sought for the pandemic. The outcome of this? Heavy falls in occupancy rates and daily rates for accommodation providers nationally, cancellation of many high profile events (America’s Cup, All blacks tours, concerts, super 15 etc.).
There has been forecast an oversupply of accommodation in Auckland for the last 12 – 18 months. This was with the forecasted tourism of growth of about 5% p.a. and we are about to see a fall of (in the short term) 90%+…
A number of projects are partially completed or have only recently come online and these will be very interesting to watch. Many of them will carry with them large debt burdens (Hotels typically suck through about $5.5 - $6k psqm to develop) and a typical trade up term is about 3 years in a normal trading environment.
The adage with Hotels and Tourism is that you should carry a 10 year horizon on your investment as the assets are typically capital intensive and markets move through cycles. The question is how many players will be able to afford to ride that out.
Tourism is also about 5% of NZ’s GDP and our largest export. There are a lot of jobs tied to this sector and we could see some pretty big unemployment numbers in the short term. That will draw further on that government support I was talking about earlier.
The benefit may be to a few wealthy operators and individuals that see this as an opportunity to invest into a market at low prices with well capitalised positions prepared for when things return to normal (and they will).
The upside is also that NZ will remain a great place to visit and it is in human nature to explore. Don’t expect this to be a permanent shift to our economy but rather a pretty difficult transition period that will take us a good 2 -3 years to work through.
Will this be the death knell for retail? Most retail businesses are already struggling and likely will not survive if the lockdown persists for more than the initial 4 weeks. Unable to trade income will have dried up and the nature of the sector means that they will be carrying limited cash reserves.
Remember that retail includes not just clothing stores but many small food and beverage operators. Your local kebab shop might not be there at 4am next time you’re on your way home from a couple of quiets…
There is also the case that with rising unemployment and a recession in the economy discretionary income and consumer spending should fall in the short term. Sales will drop and the prolificacy of retailers will likely fall.
The knock on effect from this will be for landlords who will be seeing high vacancy rates, falling returns and erosion of the value of their assets. We are already seeing a number of tenants seeking rental relief across the board with many businesses rationing to provide themselves the longest possible runway.
This comes back to tightening credit at banks as they will be seeing some portfolios go through a process of deleveraging and sale of assets. Money will likely be repurposed into other real estate (affordable housing perhaps) with some trade off on return for stability of income and your tenant.
There are some large projects (Newmarket Westfield & Commercial Bay) which I will be watching with real interest over the next few years.
House prices will be an interesting space to watch. Peter and I wrote a blog on this recently.
In the short to medium term I expect to see some deleveraging of investors who have pushed themselves very hard in recent years with high levels of gearing, non-bank lending and high value property. I also expect Air BnB stock repurposed to traditional rental stock or sold into owner occupiers which should see a fall in rental yields (supply and demand). And with credit tightening I would expect that property price growth and trading activity will slow for the next few years.
The Positive Stuff
The above is pretty pessimistic but I genuinely believe there will be some real positive things that will come out of this (every cloud right?).
Regarding debt levels and the possible deleveraging of the nation, whilst this is going to be a tough pill to swallow in the short term it will mean that as we come out the back end, things start to loosen up and the economy heads towards a recovery we should be lean (reasonably geared) and well placed to fund the next boom. Think of it like a good diet before a race. Our banks balance sheets are also solid and I don’t expect them to be challenged or fail but rather prep themselves to go again after a few years.
We are also likely to see interest rates stay low for a long time. Globally almost all governments are kicking into gear with their reserve banks taking steps to keep rates close to or at 0% and the expectation is that they will remain near the bottom for a good 3 years +. This should see us through and give a nice little platform to the next boom.
In tourism, as I touched on, nothing lasts forever and NZ is likely to be the place to go in the future. We have ‘locked in’ on this thing early and have a real chance (fingers, toes, legs and arms crossed) of kicking this thing for touch with minimal loss of life in NZ. We will retain our clean green status and as the world recovers I am sure most people will be pretty keen on a holiday.
With good investment and timing I would expect that the sector will kick off with a boom as border restrictions are lifted.
Retail, online shopping and choice for the consumer should get better pretty quick. Businesses in this space are going to have to be innovative to ensure their survival and success which will lead to better outcomes for consumers. We are already starting to see some great subscription services come to the fore (Asuwere and Winefriend to name two) and I would expect many others to begin to form in the coming years.
Lastly housing, expect to see a lot more affordable homes come onto the market. The price of land and labour in the short term should fall allowing for the development of more affordable product. This will also be required to meet demand as many punters will not be willing or able to push the boat out as much as they were 6 months ago.
If we manage to get much more of the population into home ownership over the next little while we will be in a fantastic position for letting the handbrake off and riding into the next cycle.
Tough times ahead people, but I think we are a nation that can pull through this and if we focus on looking forward there are some great things to look forward too!
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