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It appears that there is very little correlation between natural disasters and demand for property. Prime example is Hong Kong, where despite annual typhoons and the likes, prices continue its upward trajectory. And despite warnings of the Big One hitting Vancouver and the west coast of the US, prices are still scaling new heights. Asian Property Review discusses this seeming disconnect using the Christchurch post earthquakes as an example. News that earthquakes had struck Britain for the first time ever in Warwick and Leicester in the United Kingdom on 29th January this year had struck a chord in me and awakened memories of Britain years ago. I had often passed through those two cities on my way from London to Nottingham where my alma mater was.Although only 3.8 in magnitude on the Richter scale, and the United Kingdom does after all has a history of small earthquakes throughout the centuries, a sense of foreboding arose in me. I hope Nottingham is spared. I hope such a‘freak’ earthquake does not become a more frequent occurrence although I am aware that ever since the December 2004 tsunami that devastated parts of Phuket beach and many other places facing the Indian Ocean, the earth’s tectonic plates had shifted.

PROPERTY PRICES UP DESPITE NATURAL DISASTERS

It appears that there is very little correlation between natural disasters and demand for property. Prime example is Hong Kong, where despite annual typhoons and the likes, prices continue its upward trajectory. And despite warnings of the Big One hitting Vancouver and the west coast of the US, prices are still scaling new heights. Asian Property Review discusses this seeming disconnect using the Christchurch post earthquakes as an example.
ea2News that earthquakes had struck Britain for the first time ever in Warwick and Leicester in the United Kingdom on 29th January this year had struck a chord in me and awakened memories of Britain years ago. I had often passed through those two cities on my way from London to Nottingham where my alma mater was. Although only 3.8 in magnitude on the Richter scale, and the United Kingdom does after all has a history of small earthquakes throughout the centuries, a sense of foreboding arose in me. I hope Nottingham is spared. I hope such a‘freak’ earthquake does not become a more frequent occurrence although I am aware that ever since the December 2004 tsunami that devastated parts of Phuket beach and many other places facing the Indian Ocean, the earth’s tectonic plates had shifted.
The earth-shattering tsunami had literally moved the earthquake fault lines resulting in quakes occurring in places which were formerly safe from earthquakes – such as Sabah in Malaysia and even Nepal. Although Nepal is located within the fault, the devastating April 7.8 magnitude quake was totally unexpected because the last one occurred 80 years ago.
Sabah’s quake was explained by the fact that although it is 1,000 kms away from the collision of the tectonic plates, it is still receiving compression forces from the interaction of three main tectonic plates. This explains the many ‘small’ earthquakes experienced by Sabah prior to the Big One in June this year.[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1,2,3,4,5″ ihc_mb_template=”1″ ]
Oblivious to the obvious
At the same time, I am also struck by how such natural disasters have hardly influenced people’s choice of where they work and build a family. Look at earthquake and tsunami-proneIndonesia, millions are still huddled at potentially deadly epicentres of earthquakes. While at Vancouver and the entire west coast of the United States(part of the Ring of Fire) where they await the Big One (quake) at any time,prices of property have sky rocketed within the last few years. And with narya care over the very earth on which theybuild their dreams of a better future,Asian emigrants have rushed to populatethese potentially deadly spaces.Closer home, annual typhoons, floodsand even tropical cyclones in HongKong and Taiwan have hardly dented theenthusiasm for real estate – propertiesin Hong Kong are possibly the costliestin the world, chased up by acquisitivemainlanders. In Phuket, post-tsunami2004, prices have gone sky high withlots of luxurious villas built overlookingthe sea, the tsunami had been all butforgotten. Strangely, people have short memories and the idea that a similar disaster might occur again does not seem to figure in at all in their calculation of risks when putting in cash for their acquisitions.
This phenomenon is seen again a continent away in New Zealand’s South Island where earthquakes of magnitude over 6.0 wrecked devastation not seen since the last 100 years. About 4,558 quakes were recorded in the Canterbury region (where Christchurch is located) above a magnitude 3.0, between September 2010 and September 2014. New Zealand straddles two tectonic plates, and lies within the Ring of Fire, the line of constant seismic activity that circles the Pacific Rim. The country experiences about 20,000 tremors a year.
The Christchurch rebuilding efforts are ongoing as millions of dollars are pumped in. Could it be that the local population has a certain bond to the land just like me with my bond to Nottingham and even Nepal where I had spent one summer? In a sense, yes, especially in a small city (or ‘big village’) like Christchurch where practically “everyone knows everyone” and there is social pressure to stay.
“There are lots of people there who see Christchurch as ‘their city’ and want to rebuild it. You are not looked upon favourably if you leave, and everyone is expected to stay on to rebuild the city,” explains Justin Kean, Director, Research and Consultancy, Jones Lang LaSalle New Zealand. “Christchurch did not depopulate, on the contrary, there is a lot of internal migration there especially for workers in the construction industry.”
There is also a big incentive to rebuild – there are lots of money to rebuild the city, some of which came from insurance payouts. This has attracted lots of outsiders to come in to work resulting in a net population gain in the last two to three years. Not surprisingly, one in eight workers in Christchurch is in the construction industry. Even a series of earthquakes in January and a subsequent one in April this year that struck Christchurch did not rattle too much the nerves of the residents.
Housing Price Performance
Back to the million-dollar question: What is the property price performance pre- and post-earthquake? Says Kean: “Before the quake (the last one was 100 years ago), there was no real indication of pending disaster so the market just performed normally. After the earthquake, there was overrepresentation of risk.”
As Christchurch did not experience an earthquake for such a long time, the building code on earthquakes wasn’t very stringent. So, post-earthquake, the risks faced by the remaining properties still standing were magnified to reflect the fear that buildings that did not adhere strictly to earthquake provisions of the building code would be lacking in its safety aspect.
After the earthquake, engineers would do an assessment of whether the building was safe. If the engineer decided that the building wouldn’t perform, for example, the chimney would fall off, even if there was no current damage, the building would be worth almost nothing as people feared that they couldn’t sell or find tenants for the building.
This contrasts with the situation in Wellington which also experienced a severe earthquake in 2013. As Wellington has experienced several earthquakes every five to 10 years prior to the Big One in 2013, the building code was more stringent. So, the buildings there were well-built and could withstand a big earthquake better. As a result, there were no fatalities and only a few buildings were damaged.
An interesting outcome of the earthquake was that despite no damage of property, the buildings still could not be occupied. Hence, people had to make a decision quickly to move. As a result, leasing activity increased in the weeks following the earthquake compared to the inertia experienced immediately after the earthquake.
“There were more transactions in those two weeks than the entire six months because everyone worried that a vacancy would go to someone else. This phenomenon lasted a few weeks. The vacancy rate fell to 8% during that period. Overall, people are not dissuaded from purchasing or leasing. The post earthquake years of 2014 – 2015 saw more commercial transactions in Wellington, to the tune of NZD500 mil, a huge indication that people are not put off by the fact that an earthquake might repeat itself,” observes Kean.
He adds that earthquake is a natural disaster that people can plan for while “you can’t plan for a tsunami”. Also, unless you have a series of earthquakes prior to the ‘Big One’, people just don’t take that into account when making property purchases – just like in California and Vancouver. And post earthquake, people still return to rebuild and stay, whether or not they are backed by a lot of rebuild money.
Back in Christchurch, Kean thinks that there are a lot of long-term opportunities there. “The opportunities are huge now as there is a lot of construction and property-related services going on. And if the building stock has been built incorporating good government regulations, investors don’t discount the value at all,” he reveals.

As many of the old buildings have been destroyed or demolished, there is a severe undersupply of secondary stock but an oversupply of new stocks. About 16,000 homes were lost in the earthquakes, while half the total Christchurch housing stock of 181,000 dwellings have been damaged to varying degrees. At the same time, the private rental market is under extreme pressure from several other sources. These include the influx of insurance assessors, project managers and tradespeople from all over the world moving to Christchurch to assist with the rebuild.

Over 1,000 buildings in the CBD, which is about a third of the total buildings within the four avenues, were demolished following the earthquakes. Since then, Christchurch has been experiencing rapid growth, with the central city rebuild starting to ramp up, and massive growth in the residential sector, with around 50,000 new houses expected to be constructed in the Greater Christchurch area by 2028.

Last year, house prices across

Christchurch rose 12%, following an increase of almost 10% the year before. Rents since the earthquakes have soared by about 35%, more in some neighbourhoods.

According to Professor John McDonagh of Lincoln University in Christchurch, average price and rent have gone up due to the following factors:

• Increased demand for remaining houses from existing owners; those now unable to own; those displaced for repairs; rebuild workers and investors (due to higher rents);

• Increased perception of value by news media reports of increased prices and rents;

• Increased costs of construction due to excess of demand over supply in the building industry;

• Increased compliance costs due to higher geotechnical and foundation costs;

• Erosion of rating base/ development contributions of Christchurch city council by loss of CBD rates income and flight of residential development to neighbouring local authorities;

• Increased cost/reduced coverage of insurance; and

• Low value houses removed from market.

New world order’

The Christchurch post-earthquake rebuilding effort is probably typical of a developed nation’s experience after a major earthquake. Similarly, after the last big quake in San Francisco in 1989, the focus was on rebuilding and after the initial recovery period, transactions picked up again. Prices have been rising steadily since and have scaled heights never seen before in recent years.

ea1On a human scale, it seems that natural disasters are risks that are too remote for property buyers to take into account. Save for a few who took out earthquake insurance in quake-prone areas, the rest are seemingly oblivious. Will there be a hefty price to pay later?

With recent history showing an escalation of activity in areas surrounding the Ring of Fire, where about 90% of all earthquakes and 75% of all volcanic eruptions occur, this is something that property investors might want to consider as they weigh in on property hotspots worldwide. Natural disasters occur all the time and Asian cities make up almost half of the global top 10 ranked as having the highest natural disasters risk (Singapore is the only Asian city in the top 10 with a low natural disasters risk).

Notes a Taiwan-based property consultant on the seemingly oblivious attitude of investors: “The risk to them is too remote if there hasn’t been an earthquake or volcano for decades. It’s just how people are, even savvy investors. Besides, if the investors are not staying in the same seismic zone as their investments, their worry is even less. For them, they look at the returns within the next 5 years, and judging from the trend, if it looks like there isn’t going to be one during that time, then the coast is clear – even if the Big One is expected at any time. Look at Vancouver, for example – 15 years ago, they were doing earthquake drills expecting the Big One and till today the dreaded event still hasn’t arrived yet.”

Another reason, voiced a Japan-based property investment consultant is that many buildings in earthquake-prone areas in developed countries are already quake-resistant. “A good example is Japan where all structures are earthquake-resistant and all buildings are covered by natural disaster insurance policies,” says Ziv Nakajima-Magen.

Even in Nepal where you don’t expect to see many earthquake-resistant buildings, it’s striking to note that out of 58 high-rise buildings in Kathmandu, six buildings sustained no damage at all, 50 require light remedial work and only two were red-carded. None of the high-rises were toppled compared to thousands of one or two-storey buildings that were reduced to rubble. The official stand is that high-rises can still be built in Nepal but that the building code has to be revised to make them more earthquake-resistant.

As can be seen, you can’t prevent the continued agglomeration of people in popular urban centres but what you can do is to manage the risks by taking up the appropriate insurance and ensuring the quake-resistance of your dwelling.

With so many earthquakes, volcanoes

and floods happening around the world of late, are we running out of places where the Earth is free from natural disasters? No one knows for sure, so, get used to more uncertain times ahead. Just as we are getting accustomed prolonged uncertainty in the economy, so too should we get used to the uncertainty in regards to where and when the next natural disaster will strike. Shall we say it’s the new world order where battling the elements is part and parcel of everyday life?

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