Short-term pain for long-term gain for landlords

What's the chance Bob Jones and his commercial tenants will negotiate a stationery voucher in lieu of a rent-free or corona-discount period? Given the business-to-business nature of that negotiation and Bob's long-term view on property, it seems an unlikely outcome.

When Property Brokers told their landlords not to offer discounts it was a master class in human psychology. Instead they suggested supermarket vouchers or power bills paid. Why? Because private tenants don't behave like commercial tenants.

If we get used to a discount, it's difficult to control the timing of a rent increase. The psychology of receiving hand-outs makes us think rent prices haven't moved and landlords control the voucher withdrawal. It's a subtle shift in maintaining power.

Money can be as much about psychology as legal obligations. But is it the right way to behave? It reeks of a gimmick with an obvious narrative of "we don't trust you". Yet this is an unprecedented economic shock and we are well beyond power-plays.

With 3 million Americans applying for unemployment benefits in a single week, large-scale rent strikes are starting to take hold in the wake of Corona job losses.

There, some tenants fly white sheets from the window to indicate they're not paying. Slogans swish around social media "in a pandemic the rent eats last" and "tenants keep your rent, landlords keep your distance". Whole buildings have joined forces and refuse to pay, when they're not all out of work.

This kind of extreme behaviour can lead to social dysfunction and it's a situation we never want to see in New Zealand.

Right now tenants and landlords face a Mexican stand-off. No one holds more power than the other, so it's time to play fair.

While there are calls for Government-funded rental subsidies, it's fraught with issues. From an economic point of view this is a one-off opportunity to make rents more affordable by letting the market take its course.

Propping that up with subsidies fails to take advantage of a structural shift, caused by an impending wave of unemployment.

Economics is not very kind at times, so allowing this to happen will cause terrible social outcomes for families out of work. The non-eviction law at least slows that tide, but it doesn't stop debts building for tenants who can't make full payments. The stress of that will make them innovate at speed.

Landlords need to grab this window to do their negotiations. It's easy to see how the free market could do you no favours. Wearing the costs of a discount or rent-free period in the short term will keep tenants in place and avoid a stream of unrented houses.

Tenants have many ways of coping with unemployment. They will move in with family, find rooms in shared flats or take up offers from your new competitors.

These competitors are going to come from left field. A never-seen-before threat that you need to adjust to quickly:

1. Airbnbs now lie unused due to a lack of tourists.

2. Ordinary families with financial pressures will rent a room to a lodger.

3. Hotels and motels – many of which have an apartment format will want to fill rooms while borders are shut.

4. Your internal competitor - landlords with debt. They will become surprisingly realistic with low-offers, surprisingly quickly.

A note to tenants, though: Proceed with caution. These new sources will switch back to a nightly-market when our borders open. Free flowing travel will be some time away, though.

Face your own situation as a landlord

You are all in different financial positions, from the retiree with a single investment property to successful business people with a whole portfolio of rentals. Some are highly leveraged, others will be debt-free.

You may need your rent to survive yourself. Others can be more circumspect.

Being financially fair is a judgment call and it changes with your circumstances.

What doesn't change is the predicament and stress many of your tenants are facing right now. We are in unique times.

Why landlords should take a haircut

There are times in life when you have to wear the losses. Banks will offer lending holidays to landlords, restructure loans, extend the terms and move you to interest-only if you've got enough rent coming in to manage that.

We've all read the squeals in the media that tenants don't understand your funding costs are still compounding with a lending holiday. Give them the benefit of the doubt. People are not stupid.

Homeowners are in the same situation as you and will wear the costs.

Take a big picture view on it. Property is a long-term investment. Your funding costs at 4 per cent are historically low, your past gains are historically high.

After 12.5 per cent capital gains in 2019 alone, adding 4 per cent to the value of your loan is a drop in the ocean on a 10, 20 or 30-year view. If you offer a three-month rent-free period, you are only adding a quarter of that annual funding cost.

Right now, if you have the financial ability to stop young couples wiping ut their housing deposits while they cope with job losses, or families taking pay-day loans, do it. A short-term tactic feeds into a long-term strategy of not seeing the rental market take a larger dive.

Offering discounts or a rent-free period is by no means mandatory. While you can't currently evict, you're legally entitled to chase the debts later.

If you are forced to spend the next few years doing that, so be it. No one can judge as your circumstances may dictate it.

While we are very clearly in the midst of a global economic disaster (likely a depression, not just a recession) it has a finite end-date. In history it's hard to recall anything so deep that had a known finish. A vaccine or an extensive worldwide testing regime of catch and control will let us begin the recovery. Use that as your perspective.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.