Commercial Comment 9 August 2011

Posted on Tuesday, August 9 2011

It seems as though we live in a world where nothing is constant any more apart from the predictability associated with the daily dose of bad news and impending global meltdown either from Mother Nature or the world economy.

I made the comment some time ago that you cannot simply print the amounts of money which the U.S. and the European Central Bank have been printing without a day of reckoning. That day duly arrived for the U.S. with its downgrading of its credit rating for the first time in history. In Europe, the banks are under capitalised and the European Central Bank has its hands full with the fiscal plight of Portugal, Ireland and Greece. Now, Italy and Spain, the Eurozones third and fourth biggest economies, are causing real concern with the Bank not buying up their bonds. This has sparked a flight by other investors who quite correctly argue that if the Bank won’t invest in the bonds, why should they? Hard to argue with really.

The impact of these global developments was to wreak havoc across equity markets worldwide including wiping over $1 billion from the New Zealand Stock Exchange and the Kiwi tumbling 6 cents against the Greenback in one day, demonstrating our exposure and connectivity to global markets.

There can be no doubt that such turmoil impacts on the commercial property market as it affects investor confidence and tenant sentiment alike. Tenants who may have been considering a move to larger premises or renewing for a decent lease term suddenly pull back and reconsider.

The reality is that the current world economic situation will be with us for some considerable time with some commentators expressing a belief that it will be at least seven years before the U.S. economy is back on a level playing field. Unfortunately, commercial property is not immune from the effects of these global conditions. Ironically, the very same conditions are driving investors into commercial property to escape the chaos of the equity markets. Certainly, those properties which are leased to solid tenants on long leases will prove popular in these uncertain times as investors seek to ride out the choppy waters of the next few years.

D.J. McMahon
Managing Director
McMahon Commercial

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