The performance of New Zealand commercial property in 2014 substantially outshone the global market, according to figures released by London-based MSCI, which measures the total returns of investment-grade real estate. [Editor's note: MSCI is no longer linked with Morgan Stanley, as stated in a previous version.]
Over the year, New Zealand commercial property returned 11.3% – versus a global average of 9.9%. New Zealand joins a small group of largely English speaking countries, which have recorded the highest annualised returns (in local currencies) among major developed countries over the past five years.
Based on data compiled by MSCI subsidiary IPD, New Zealand, Australia, the US, Canada, and the UK all recorded double digit returns – while most European and North Asian markets recorded low to mid single digit returns.
Currency swings are also having a material impact on property performance. In New Zealand’s case, the strong kiwi dollar throughout 2014 significantly enhanced returns for existing offshore investors.
For example, if IPD’s New Zealand All Property returns were reflected in euro, they would have measured 21.1% over the past 12 months – a whopping 80% increase to the New Zealand dollar return.
Bayleys Real Estate national director – commercial real estate John Church said this combination of strong currency plus value gain could be enough to tempt some offshore investors to crystallise at least a portion of their New Zealand holdings and move funds to markets showing better upside.
“Europe is an obvious candidate, with most markets there in the early recovery phase of the cycle, with the added benefit of a very weak euro,” Mr Church said.
“However, there are no signs of a slowdown in the wave of money, both local and offshore, descending on the New Zealand market chasing high-yielding assets. While global central bankers continue to print money and interest rates remain abnormally low, little is likely to change.”
Mr Church said that as a reflection of these conditions, yields across all of New Zealand’s major commercial sectors – office, retail and industrial – had firmed between 100 to 150 basis points over the past three years.
Recent Bayleys Research vacancy surveys are all confirming just how tight conditions have become across all sectors. The only exception is secondary office markets where occupier migration to newly developed space is gathering momentum and causing backfill issues.
By comparison, Auckland prime CBD office vacancies are a very low 3.3% and Auckland retail vacancies stand at just 4.5%. Industrial vacancies are the lowest they have been in at least 20 years in Auckland at 3.6%. Predictably, these tight conditions are beginning to flow through to rents which are expected to show further increases over 2015.
IPD numbers to March 2015 show annualised total returns for all property (office, industrial and retail) were 11.7%. This is above the long-term average of 10.6% but still well below the highs achieved pre global financial crisis of 24% in 2007.
“With property market conditions for both occupiers and investors so tight, especially in Auckland, it is not difficult to see further performance upside,” Mr Church said.
“Capital returns in particular are likely to form a larger component of total returns over the remainder of the current up cycle. For the 12 months to March 2015 they were already up 50% – from 2.6% to 3.9%.
“One of the major challenges ahead though is a shortage of investment grade stock in New Zealand. Most of the existing prime properties are already owned by just a handful of players –the four largest listed property vehicles – Kiwi, Goodman, Precinct and Argosy.”
Mr Church said that, looking to the future, New Zealand could expect to see more joint ventures emerging between the larger local players and major offshore groups seeking New Zealand exposure – such as sovereign wealth funds and larger institutional investors.
“This provides a way for local players to reduce specific risk exposures while still retaining control and freeing up funds for further growth-enhancing opportunities such as development,” he said.
“It also allows larger offshore groups to take substantial, longer-term positions in existing institutional grade assets and/or participate in new development activity.”
Market analysis by Bayleys Research highlights that this trend has already begun – with the announcement late last year of a joint venture between Singapore’s sovereign wealth fund (GIC) and Goodman Property Trust for $331 million worth of property assets in Auckland’s Viaduct Quarter.
About the same time GIC also entered another joint venture with Australia’s Scentre Group over five of Westfield’s New Zealand shopping centres valued at $2.1 billion. In both cases, GIC has taken a 49% holding in the joint ventures.
The Canadian Public Sector Pension Investment Board has also been active in New Zealand, with the 100% acquisition of the AMP Capital Property’s portfolio of 18 properties, which was valued at $1 billion last year.
Goran Ujdur writes for Bayleys Real Estate
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