Directors Market Commentary: Churchill on Covid-19

Churchill on Covid Image

Some have likened Covid-19 to this generation’s war. My Grandfather who died in the war, and my Grandmother who had to deal with his death would probably shake their heads and tell me I‘m as soft as an over ripe avocado.

That said, it is probably the greatest challenge this generation has faced and that shouldn’t be scoffed at. We started Erskine + Owen in 2007, just before the Global Financial Crisis. Looking back the angst and sleepless nights seem a bit trivial. But I should give my younger self a break as we’d never faced those challenges before. Lockdown is unchartered, stressful territory.

Let’s look at what Winston Churchill might have done.

What is the war and why should we fight?

Churchill was brilliant at defining the war in a frame of understanding for the British people. Churchill approached it spiritually – he talked about the evilness of Hitler and the attack of paganism he was bringing on the British way of life. Keep in mind that back in WWII times a majority of the population probably had a Christian outlook on life and the thought of Hitler taking away their way of life,  ignited a fire in them.

What is our war? This is a fight for our financial prosperity and the well being of our communities. It is the fight against financial loss, financial destitution. We must fight the enemy of financial failure for the benefit of everyone. If we don’t get up and fight this, our children will be lumped with debt that will take decades to eliminate.

Define Victory?

Our fight is not on the beaches – though the Police may currently argue differently. Our fight is against shrinking cashflow. Churchill in his speeches spoke about the bright future the people of the UK would be rewarded with, for all the pain and suffering they were going through. He contended that the hardship was the price that must be paid for the free life their children would inherit.

If we are fighting shrinking liquidity, then surely victory is getting our property investments and portfolios back to smooth running with the bank off our backs. No, we are not sending young men and women off to fight to risk their lives. But we are fighting so that we can retain the lives we have worked so hard for…for ourselves…and for others.

And let’s be clear, the winner of a war is not based on who looks nicest at the end of the battle. It’s who has survived. Who cares if you have to sell a property to release some cashflow – sometimes a pawn or two has to be sacrificed. Winning in the first instance is about survival. Worry about funds for the overseas trip and renovation later. While selling a property might be the last resort, prepare yourself mentally for it, and don’t feel like a victim ‘having’ to sell a property. Be prepared to lose a battle to win a war.

Decide now what victory looks like for you. Decide in advance how you will celebrate when you win!

Face Reality

Churchill fought depression his whole life. But that did not stop him insisting that his ministers and advisors give him the truth no matter how bad it was. When he came to office, things were much worse than he thought. But at least he knew what he was dealing with.

Let’s get very clear about how bad things could get. Yes, we could well be up and running to some degree at the end of 4 weeks. But forecast your cashflow based on longer so you know what you are dealing with if it happens. And that way you won’t build up expectations and feel thrown in a ditch if the lock down gets extended.

We had tenants abandon a personal property of ours in Queenstown, on the eve of lock down. Ouch! After lock down it could take a while to get a tenant and the rent will probably be lower. Ouch. So that’s what we’ll forecast. Now is not the time for hockey stick growth graphs.

Get a spread sheet going, or if you need help then call us. Property cashflow forecasting is what we do all day every day.

Take Action 

When the German planes came across London to bomb, Churchill would go up on the roof top with his revolver and shoot at the planes and swear at them. No, he didn’t expect to bring one down, but the people saw him taking action and that was motivational. If you are feeling freaked out and unsure what to do…taking action, even a small act, will make you feel better. It will get you moving, and it’s much easier to steer a moving ship.

Here are some important actions you should consider

If you are an investor in residential property, protect your rent. If your tenants ask for rent reductions, be compassionate. Ask them to supply proof they have lost income and if they have been to their bank for assistance. Once they have done that, get them to talk to WINZ. The Wait times may be lengthy, but once people get through there is assistance for those that qualify. If all the above avenues have been extinguished, initially discuss temporary rent reductions or deferrals for the period of lock down, and review after that.

If you have a mortgage, talk to your bank sooner rather than later. The banks have come into this in good shape. Unlike the GFC, this is not a financial led crisis. The loan to value ratio restrictions implemented post GFC on property lending and a reduced appetite for high risk development lending, suggests the banks are well placed to assist.  If you have been financially impacted by COVID-19, it is highly likely your bank will be able to support in some way. You may want to consider changing to interest only to keep your monthly payments low.  You could also ask to capitalise your mortgage interest, but you will be adding this to the principal of the loan, so will eventually pay more interest on a regular basis once interest payments start up again.

If you are a commercial property investor, it is likely your lease is an Auckland District Law Society (ADLS) standard lease agreement.  This lease type includes a term (clause 27) whereby if a tenant has “no access to the property in an emergency”, then the tenant is permitted to request a reduction in rent on a ”fair proportionate” basis which applies to the time the tenant has no property access. What is important here is to firstly get your tenant to keep paying rent until a reduction, if any has been negotiated. Then, get evidence that they have been adversely impacted. If so, find out how much their revenue has reduced and use this as a basis for negotiating a reasonable reduction in rent. It is in every investor’s interest that all sectors of the property industry remain viable, including the businesses of our tenants. As part of its Covid-19 relief package the Government has also reinstated a tax depreciation allowance on commercial and industrial property at the rate of 2% per annum from 1 April 2020.  This will provide a boost to commercial and industrial property owners, that will be worth millions of dollars across this sector.

Government business loan up to $500k. While you can’t use the loan for topping up shortfalls on property investments…it may be just the capital you need so you don’t need to sell a property to fund your business. For more info, check out this government website and talk to your bank. Run the numbers on whether it is worth breaking your current fixed interest arrangement to take advantage of the lower interest rates. Will the bank capitalise the break fee? We can help with these calculations. “Be kind” is perhaps most appropriately applied to your banker. Who would you rather deal with…a stressed out angry client? Or a prepared, thoughtful, patient client?

Government counter attacks are already underway, and they are mostly about keeping liquidity in the market place so the wheels of the economy don’t freeze up. I won’t debate the adequacy of what has been done…the focus is knowing what we have at our disposal and being encouraged by the action. Here’s what the government has done to date:

  • Introduced a wage subsidy scheme to protect jobs
  • WINZ is providing additional support to those who have lost jobs
  • A business loan scheme – Government backed bank loans of up to $500k
  • Measures are on the table to support commercial property landlords and tenants
  • Introduction of new solvency law softening rules requiring liquidators to be called in.
  • Provisions for businesses to place debts into hibernation until normal trading resumes.
  • Business tax-refund package – provision to offset losses against prior year profits
  • Residential rent increase freeze. As landlords we aren’t gleeful – but it is also critical to the economy we keep as many people solvent as possible

The Reserve Bank has also acted:

  • Dropped OCR by 75 basis points…with 25 basis points left to play with
  • Is buying up government bonds and corporate securities to support liquidity, fueling bank confidence and the potential for lowering interest rates further.
  • The RBNZ has pushed out the date by 12 months for which banks need to adhere to new capital adequacy rules

There will be other initiatives I haven’t mentioned and still more assistance yet to come.  I’m not suggesting, these things will by themselves ‘win the war’. But what it does do, is help us step back and see that while Covid has attacked our shores, there are counter measures being taken.

Mentally Ready to Fight

The other night I watched an old documentary on You Tube on what applicants go through to get into the NZ SAS. 50 people started and only 3 got in. The physical hardship they face is mind blowing…10 days of nothing but relentless physical exertion – all with packs on, fighting blisters, little food and less sleep. But the physical challenge was not really the barrier…what defeated most, was  themselves – their own headspace.

On that note I hope these things help:

  • One of the requirements of SAS members is a sense of humour. A bit of laughter gets the endorphins flowing and allows us to see things from a different perspective, which is critical if we are to see our way out of this mess. Churchill always maintained a sense of humour. While staying at the Whitehouse to petition the US on war supplies, the press was convinced Churchill was hiding something.  One afternoon Churchill was in his room taking a bath. President Roosevelt got wheeled in, in his wheelchair, just as Churchill was getting out of the bath… Roosevelt, embarrassed, instructed his aides to wheel him out. But before they could turn him around Churchill whipped his towel away and said “nothing to hide here sir”.
  • “Never give in” was the quote that made one of Churchill’s most famous speeches. For myself that is better than “we will get through this”. The only thing we can control is our determination to reach a goal.
  • Churchill was brilliant at addressing the nation, he knew the power of words. A WWII veteran interviewed for a Churchill biography said he was sitting in North Africa, starving and getting beaten by the Germans, when Churchill came on the radio. It was at that point of hearing his words that he knew they were going to win the war. What is the story you are weaving in your head? Is it one of impending doom – or is it stories of how you won battles?

But most importantly act. Please get in touch with us. We’ve experienced some of these same challenges before and can help.

Email: Wendy Ryan-Kidd, wendy@erskineowen.co.nz or Toby Hunn, thunn@erskineowen.co.nz