Housing Strength Leads Business Confidence
As the end of another financial year passes, at TBK Capital we’re celebrating the end of our second year in business. Examples showing the range of fundraisng transactions we completedin the last financial year are given later in this newsletter. We are now looking forward to the current year in a far more positive economic environment.
I can see clearly now, the rain is gone
I can see all obstacles in my way
Gone are the dark clouds that had me blind
It's gonna be a bright (bright), bright (bright)
Sun shiny day
To see the Johnny Nash classic click here
As the end of another financial year passes, at TBK Capital we’re celebrating the end of our second year in business. Examples showing the range of fundraisng transactions we completedin the last financial year are given later in this newsletter. We are now looking forward to the current year in a far more positive economic environment.
Confidence up
The New Zealand Institute of Economic Research, in its latest quarterly survey of business opinion, shows we are in the most broad-based economic recovery since the recession began in 2008. See interest.co.nz article here.
It shows economic activity was strong in the March 2013 quarter with recovery broadening from Canterbury and Auckland to other regions. Business optimism is now the strongest reading since June 2007.
“There are encouraging signs of a broadening and strengthening economic recovery across regions and industries. Businesses are hiring and investing more. This is the most broad based strength seen in the survey since the recession began in 2008” said Shamubeel Eaqub, Principal Economist at NZIER.
Housing up
As long time readers of my newsletters will know, I believe the housing market leads the economy. So the latest news on the increase in residential sales and prices is a sign of the future. Most if this is good - but it comes with a warning.
A recent Real Estate Institute report shows the number of New Zealand house sales rose to a 6 year high last month. Prices reached a new record as Auckland continued to drive up the national average. Sales in March were up 23% from the previous month and up11% from March 2012. See Herald article here.
The national median price rose an annual 8.1% to a new record $400,000 (up from $382,000 in February). But over 90% of the increase in the median price came from Auckland and Canterbury – which account for about half of all sales. For example Auckland's median sale price rose 5% to $565,000 from February while Canterbury/Westland's increased 1.1 % to $359,000. The REINZ stratified housing price index, which smooths out peaks and troughs, was up 16% on an annual basis.
"There's a real danger that the Auckland housing market is mistaken for the New Zealand housing market, and that regulatory decisions will be made on the assumption that conditions in Auckland and Canterbury are replicated across the rest of the country," chief executive Helen O'Sullivan said in a statement. "Across the rest of the country while activity is picking up, price gains are far more modest."
The REINZ website has pages of statistics going back 10 years. If we were to pick the 5 years from 2008 when the GFC hit we see:
o Total house sales have increased from 5,129 to 8,128.
o The Median House Price has risen from $348,000 to $400,000.
o The Median Days a House to sell has dropped from 40 to 31.
Survey shows housing popular investment
The February ASB confidence survey showed rental property was moving ahead as the investment of choice – particularly in Auckland.
According to ASB Head of Wealth Advisor Jonathan Beale, “In a reflection of what we keep hearing about in regards to the uneven demand for property around the country, Aucklanders remain most optimistic about returns on rental property.”
Those responding to the survey remained optimistic about investment returns throughout the country and across most demographics. According to 19% of respondents rental property is viewed as being the asset most likely to provide the best returns for investors.
Not surprisingly 24% of Auckland respondents perceived property as the most likely to give the best return. Just 18% believed term deposits the best while 12% believed KiwiSaver was the best option.
See the Interest.co.nz report here.
But a shortage looms
BNZ Economist Tony Alexander’s view is the housing shortage was foreseen and will worsen.
He says, “The situation now is that in spite of the Commerce Select Committee undertaking an investigation into housing affordability in 2008, and the Productivity Commission last year repeating the exercise, five years of action have been wasted and the situation is even worse.”
The article also touches on a matter attracting special attention, being the perception that Chinese buyers are playing a major role in the demand for houses. However his BNZ-REINZ survey showed:
o In Auckland 23% of house sales are to first home buyers (24% nationwide), 22% to investors (19%), and
o 11% to people offshore (9%).
The survey also asked where the foreign buyers were coming from. This showed that half were from just three countries - 19% of Auckland offshore sales are to people from China (15% nationwide), 15% to people in Australia (14%), and 18% to people in the UK (18%).
And a warning
The good news for owners of houses is their perceived wealth and ability to borrow against housing at the current low interest rates - often to finance business enterprises - is improving.
However Finance Minister Bill English has warned the Government will act to curb rising house prices as it represents a risk to New Zealand's economic recovery.
Mr English said price levels were already high by international standards and recent history showed periods of fast rising house prices could create instability for households and the financial system when prices eventually dropped. "We will act where we can to reduce these risks following recommendations of the Productivity Commission last year." See Herald article here.
Prime Minister John Key says the government is doing all it can to help the Reserve Bank avoid having to put up the Official Cash Rate in response to Auckland house price inflation. He said the house price inflation in Auckland, which is now running at an annual rate of 16%, had only recently become a problem.
"In terms of housing price rises in Auckland, for a long period of time that hasn't been an issue, but as confidence returns to the market that's increasingly starting to become in issue, partly driven off very low interest rates," Key said.
"The government wants to assist if it can in the process of making sure land supply is made more readily available and overall the market functions as well as it can, and that's been the basis of some of the RMA (Resource Management Act) reforms, among other things.”. See interest.co.nz article here.
At TBK Capital we see little prospect of an increase in interest rates in the immediate future.
Business is better and needs more funding
We’re also seeing business confidence returning. There are more enquiries about raising funds - both debt and equity - and our sister company, Tabak Business Sales are noticing the days to sell a business are reducing.
Another observation from our Tabak Business Sales friends is they are starting to see more “younger” businesses coming on the market. These may not have the history of the longer standing businesses, but tend to be better set up for the current environment of web sites, email and smart phones.
TBK Capital now has many newer businesses approaching us looking for funds. Most receive capital from the classic sources – friends, family and fools. Loans are hard to obtain without collateral security like residential property, and the proposal needs to be properly presented with business plans and financial projections.
The most heartbreaking cases are where the business is past start-up, is making sales (and profits), and needs working capital to increase them. So often we see the case where the owner/s have used residential property as collateral security to obtain bank loans and just when they have reached the stage they need funds to expand, have run out of equity in the house.
When approached the bank say they would be happy to lend more, but without more security are unable to do so now. The suggestion is come back when they can show say 3 years of profitable accounts and debt servicing ability.
I was therefore fascinated to read another article by Tony Alexander in which he surveyed his Weekly Overview readers who were invited to respond to the question:
“If you had the power to change just one thing relevant to the success of your business going forward, what would it be?”
The answers are given in his paper What Do Kiwi Businesses Think Controls Their Success? This is well worth reading as it addresses a very important matter for business people.
The responses show that typical Kiwi businesses look to outside agencies and forces to determine their success. Only 11 out of the 134 responses (8%) focussed on what the respondent had control over.
Included in the changes sought, and over which business people do have control, is More Capital.
How TBK Capital can help you
Which brings me to the point where feel I should remind you - on the second anniversary of TBK Capital being in business – that our business is sourcing debt and equity finding for property and business.
Here are some examples showing the range of funding we’ve arranged in the last financial year.
Debt
Sums involved in the following samples range from $65,000 to $5.5 million.
o Raised development finance for residential housing project.
o Raised loan for large private business to acquire partner’s shares, refinance part of existing debt, and provide working capital.
o Arranged invoice finance facility for motor vehicle importer.
o Arranged debtor finance facility for a large private business in the transport sector.
Equity
TBK Capital structures, documents proposals, and raises equity for our clients, or contributes to fund raising ventures originated by promoters with whom we have an association. We have a large database of interested parties.
o Successfully secured private investment for the Living Green share offer, matching the NZVIF contribution. Oversubscriptions in Living Green are now available.
o Secured significant investment in a number of KCL property syndications.
o Participated in securing private investment in 1Above Flight Drink offer.
o Participated in securing private investment in the Global from One Day Fund.
o Seeking participating investor in E-business producing management tools for SMEs. This is available now.
TBK Group
Over the two years since TBK Capital was formed we have evolved the TBK Group through the establishment of affiliated companies and complimentary services. Here are three things that you may find worth noting.
o Associate Sandy Hay has just joined us. Sandy is based in Tauranga and has over 30 years experience in SME ownership and management including Franchised Motor Vehicle Dealerships, Supermarkets and Import/Distribution. He is also a Chartered Accountant and spent 5 years as a Business Broker. Sandy’s contact details are sandyhay@tbkgroup.co.nz or mobile 021 379 596.
o TBK has formed an association with a long time friend who has developed an eighteen year relationship with intimate contacts in China and the Middle East who are looking at larger investment in New Zealand. This could include private/public partnerships. He has just returned from a visit to the UAE. Together, with the assistance of Government agencies here, we intend producing a high quality publication promoting specific opportunities for investment in New Zealand. This will be presented in person at previously arranged visits to those countries. If this is of interest please give me a call.
o We are always looking for suitably qualified individuals to partner with us in TBK Capital, or for that matter the TBK Group, and share in the fees the businesses generate. If you know of anyone who might be interested we would be delighted talk to them. See our newsletter regarding this opportunity here.
Well that’s enough of the commercial.
At TBK Capital we are looking forward to an improving economy and a successful new financial year for all.
We’re always happy to hear from you. Either email or I can be reached on 09 307 3257 or 021 902 901.
Cheers
JP
John Paine
TBK Capital Limited
Level 15, BDO Building
120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Fax +64 9 309 4519
Mobile +64 21 902 901
Email john.paine@tbkcapital.co.nz