Covid-19 is a health crisis which in New Zealand is close to being eradicated (as long as we continue to lock in the gains we made during lockdown). It is the economic aftermath that investors will living with for years to come. Twenty to thirty percent of businesses might never reopen and forecasts have unemployment ranging between ten and twenty percent of the workforce.
More than ever, the current economic crisis has highlighted the importance of (1) having a clear investment strategy and (2) managing your risks.
According to the NZ Property Investor survey this year, roughly half of property investors still think it is smart to have all their lending with one bank. Maybe they can negotiate a better deal, or squeeze out another loan by giving up all of their security. And it’s easier than dealing with multiple banks.
Although COVID-19 was a ‘black swan’ event that couldn’t have been easily predicted by anyone except Bill Gates in 2017, the reality is a debt-fuelled economic crisis has been looming for years and it just needed a trigger. This is a humdinger!
There will be investors that lose serious amounts of wealth in the current market, and the fallout will be a magnitude bigger than the GFC. Back then, there were a number of high profile (high risk) investors who lost their shirt. Expect the same again.
Splitting debt across lenders is one of the smartest things an investor can do to control the conversation with lenders. It is naïve to assume the lender values you as a borrower. In a growth market, lenders will chase your business and might even show some flexibility. But when the credit cycle turns, as it now has, the focus is entirely on reducing credit risk exposures and any ‘flexibility’ disappears fast.
All of this is situational. You’re ok until you’re not. Eight weeks ago who would have thought that our tourism sector would be decimated? It is too late (or will be expensive) to act after your situation has changed.
What does your risk management strategy look like? What happens if your tenants cannot pay the rent? What happens if you sell a property and the bank keeps all of the sales proceeds? What happens when you come off interest-only and the bank forces principal and interest because your property value has dropped? What if you see the deal of the century and the banks says no?
Finally, property will be a great long-term investment especially at these insanely low interest rates. This is likely to be a short but harsh recession with a strong recovery on the other side. In the short-term, that creates buying opportunities for those with strong balance sheets, and risks around rent cashflow for those that are more vulnerable.
Ironically this is the market where the genuinely smart low-risk investors who understand the importance of planning long-term and through cycles will grab more of the pie because they can. The rest of us will sit frozen on the side-lines, or worse still lose our shirts. Who do you want to be?