Northland Property Investors' Association

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27-07-2008

Trading places in a tight market

NZHERALD

The "trade" market, in which sellers and buyers offer to exchange properties or other assets to help conclude a property transaction, is coming back into prominence again.

Bayleys Real Estate has established a national database of clients who are willing to consider trading properties. It has also established an internal "B Traded" website so its salespeople from around the country can list offerings that can be traded.

Mike Houlker, Bayleys Auckland Central commercial and industrial sales manager, who is spearheading Bayleys' national initiative in this sector, says the increased incidence of trade transactions is a reflection of a more challenging and slower market.

"With finance harder to source in the current market, we are having to present vendors and purchasers with a greater variety of options to consider in order to make transactions happen."

Trades generally involve the exchange of one type of property for another, usually with a cash consideration equating to the difference in price between the two.

"We've got vendors wanting to reduce their debt by downsizing their property holdings and others with equity looking to take advantage of good opportunities in the market by trading up. We've also got parties wanting to move from non-income-producing property assets to income-producing ones, or from residential into commercial and vice versa.

"It's really a case of matching up people's requirements and coming up with a satisfactory result for both parties - taking into account their individual financial circumstances."

Types of trade properties Bayleys has listed include commercial and industrial buildings and land, residential, coastal and rural land, residential and lifestyle dwellings and apartments. There are also categories for investors who may want to include cars, boats and businesses.

Houlker, who began working for Bayleys in 1986 as a commercial and industrial property finance broker, says the trading of non-property items as part of a property transaction was common in the major downturn of the late 1980s and early 90s and is likely to become more prevalent again.

"The commercial and industrial market is nowhere near as bad as it was back then, when we had masses of vacant and semi-vacant buildings for sale, but it has definitely slowed and agents are having to think much more laterally and find the angle that is going to make a transaction work for both parties."

Houlker says trade deals can be quite difficult and time-consuming to pull off and "aren't for everyone", but they can be very satisfying, particularly when they help clients out of a challenging situation.

"We're fortunate that we have a number of wise old heads working for us who have been through the tough times of the late 80s and early 90s and they have the experience to identify opportunities and put together a transaction that results in a win-win for both parties."

Brian Johns, of Bayleys' Auckland Central office, with more than 20 years' experience in the industry, says the key to a successful trade transaction is clearly identifying what the property owner's requirements, or problems, are.

"Once we've established that, we can often help find a solution for them."

He cites as an example a transaction he is working on where the owner of an accommodation property does not have a lot of experience in this specialised sector of the market but he does have equity.

Johns has matched him up in a part trade, part cash transaction with the owner of apartments who does have hospitality expertise but does not have all the equity needed to buy the accommodation complex.

Another example is a sales contract involving an owner-occupier, as purchaser, expanding into larger premises. As part payment, the institutional vendor would take over the ownership of the smaller premises the purchaser is vacating.

"This is a relatively straightforward example of a trade transaction but it has still taken over a month to pull together. They often require a fair bit of hard work and perseverance," says Houlker.

Bayleys is building up a substantial database of property owners looking to trade different property.

Houlker has a 3.9ha lifestyle block in Bombay with a Lockwood home on it and an asking price of $875,000, where the vendor is looking to trade up on residential land consented for development or partially finished properties.

Grant Dickson, of Bayleys Auckland Central, is handling the trade of seven two-to-three-bedroom apartments (worth around $3.5 million) in the Bella Vista complex on the Te Atatu Peninsula. The vendor is willing to trade up to an income-producing commercial property of $10 million-plus in value. He also has an agreement under contract involving the trade of $700,000 of apartments into a commercial property with rental income valued at $1.9 million.

"As long as the parties initiating the trade have up-to-date valuations and are realistic in their expectations, it can well work for both," says Dickson.

"Like trading a used car for a new car, what is important to the purchaser is the value difference and what income is available to then service the level of debt they are taking on."

Bayleys Auckland Central's Richard White has a wide range of retail properties available for trading and business opportunities include motel, hotel and tavern offerings.

One of a number of industrial properties includes food-grade standard premises in Mt Wellington with a long-term lease to a meat processing company at net rental income of $163,000. The property trading owner is seeking an opportunity to either trade up or down into other income or non-income-producing property assets.

"Typically a trader will either have fairly specific requirements as to what they are wanting or, as in this case, will be prepared to consider a wide range of options provided they can see some upside," says Houlker.

Chris Bayley, Bayleys Real Estate's general manager commercial and industrial, says the increase in trading activity is symptomatic of what has become a more pronounced "two-tier" commercial and industrial property market over the past few months.

He says top-tier property is generally holding its value, reflected in Bayleys' sale under the hammer of an ANZ bank outlet in St Heliers at a 5.6 per cent yield. While yields of below 6 per cent were not uncommon a year ago, they are now achievable only on exceptional property, such as those in strong locations occupied by tenants such as banks or oil companies.

He says property investors are making a distinction between prime property and the rest of the market.

"We are seeing a bigger yield gap opening up between high-quality offerings, which are in short supply, and other properties where capitalisation rates are now sitting in the 8 and 9 per cent range, and in some instances pushing out over 10 per cent again. Vendors are also having to consider other options such as trading to move a number of these properties"

However, Bayley says owners of some of these higher-yielding properties are still making good capital gains based on strong growth in rental values over the past few years.

"The market has probably peaked for secondary properties and rentals may come under a bit of pressure at the next rent review, so a number of owners are deciding that now is the best time to sell even though they are doing so in a softer market."

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