Last month, New Zealand’s construction industry suffered a sudden disruption as companies like Ebert and Orange-H collapsed. From an outside view, it was a bit surprising…after all, the economy is booming and demand for new buildings ought to follow.
We’ve certainly observed that in the residential sector.
Increased demand combined with limited supply meant house prices have soared.
But instead of that being a catalyst of success for Ebert, it ended up sinking them.
The company claims that it’s the lack of skilled labour that put them in a bind. But it’s hard to connect that statement with the fact that they owe subcontractors and tradesmen $40 million.
Maybe they’re implying that the labour shortage meant that the labour they could find was expensive. That could be true…but Ebert still should have calculated that into their cost estimations.
And now that the company’s gone into liquidation, those folks want to get paid.
Unfortunately, there’s not much left…and many people will go home with empty pockets.
A landlord’s market
One group that’s benefited greatly from the housing boom has been landlords.
For those not in New Zealand, the rental market here is a bit like the wild west.
Demand has surged over the past decade and now nearly 50% of Kiwis rent.
It’s meant that renters must fight tooth and nail to secure a place. And since landlords hold all the bargaining chips, they can mould the deal to their advantage.
Feels a bit backwards.
But if you’re a landlord, you’re loving it.
Of course, some resist the urge to rip off their tenants and do offer reasonable deals, but others push the boundaries to wring every penny out of the favourable situation.
For example, New Zealand is one of the last developed nations that allows for ‘price-bidding’. Effectively, landlords gather interested parties and auction off the rental…as opposed to setting a price and accepting the most-qualified applicants.
Another unique concept to the Commonwealth is charging a ‘letting fee’. This is a fee that landlords charge tenants for simply granting them tenancy. And it’s typically a full week’s rent — an expensive cover charge just to get in the door.
And once the tenant is signed on, some landlords disappear or refuse to maintain the property.
A good example of this is the landlord in Papakura whose property was sinking underwater…and he refused to lift a finger to fix it.
(Fortunately, media outrage triggered a government investigation and he’s since been forced to make amends.)
The point to get from all this is that today’s real estate market in New Zealand has not only become unaffordable for most, it’s become oppressive.
And yet, for most Kiwis, it’s also unavoidable.
Even many retirees or near-retirees are stuck in renting situations…with the prospect of ever owning fading away.
Statistics NZ reported that nearly 100,000 Kiwis over 50 years old were renting.
Is that the new Kiwi dream? [openx slug=inpost]
A new way to look at renting
One interesting solution is a new model proposed by Haven Funds.
The fund focuses on property investments but plans to apply its new model for new rental agreements.
Instead of the typical imbalance of power between landlord and tenant, Haven will serve as a ‘housing provider’ and will offer long-term services to its ‘customers’.
So, forget bonds or letting fees…
Forget appeasing your landlord…
These guys want you to be a happy customer…and to stay with them for as long as possible.
It makes sense, right? If you’re building a business, your best bet for succeeding is having repeat reliable customers. You’ll enjoy long-term stability and consistency…and that’s valuable for business owners.
Since these guys are investors, they’re looking at it from a returns perspective. They’re bolstering whatever appreciation gains they’re getting from the property with a consistent rental yield.
According to Haven, they expect to generate above-average returns for their investors over the five to ten-year range.
At the same time, tenants get to enjoy an elevated level of service and respect…
Something we’re seeing less and less of in today’s market.
The model isn’t too different from property management companies, but the emphasis on the property appreciation over tenant fees means renters won’t get squeezed for every dollar they have.
Frankly, I’d recommend that all property managers get on this train.
Start thinking about your business without obscene bonds, letting fees, price bidding, etc…because the day is coming when those practices could be banned.
And your business will need to stand on its own two legs.
It’s just a matter of time. Housing Minister Phil Twyford has publicly addressed these practices and promised to regulate them in the coming months.
Stuff.co.nz reports on Twyford’s position:
‘Under the current laws, particularly when there is a shortage of housing and it’s a landlord’s market, the market can be harsh and oppressive to people.
‘What we need are laws that bring the best out in people, and encourage their better side. And that’s why modernising the tenancy laws will be about a set of rules that work for landlords and tenants – and encourage for instance longer term tenancies, which are good for families and good for landlords.’
In other words, get ready for a big shake up…the sun may be setting on this wild west.
Editor, Money Morning New Zealand