Small market looming large

Small market looming large

New Zealand is the first country to see the sunrise and as dawn beckons on the third decade of the millennium, global investors are increasingly awakening to the attractions of the country’s commercial real estate.

In the midst of a protracted period of historically-low interest rates globally, the demand for higher-yielding assets is extending the property cycle as investors scour the globe for returns.

With its highly-attractive yields and total property returns which exceed those on offer in most mature markets across North America, Europe and Asia, this small South Pacific nation of five million people is looming ever-larger on the radar of international investors.

In the global context, the country’s returns on commercial and industrial real estate are both attractive and resilient. This asset class in New Zealand has consistently generated double-digit returns following the recovery from the global financial crisis, with an average annual return of 10.6 percent over the three years to March 2019, according to data from MSCI.

Ryan Johnson, Bayleys' national director of commercial and industrial, says local vendors are increasingly mindful of the international appeal presented by the New Zealand property story, and the advantages to be gained by considering offshore interest when selling commercial and industrial real estate.

OPPORTUNITIES ON THE RADAR

“As the world has effectively become smaller thanks to technology, ease of air travel and a desire to proactively seek out opportunity, New Zealand has clearly come into focus on the global real estate radar.

“Combined with investors’ desire for greater global diversification, this is greatly expanding the pool of potential buyers of New Zealand assets and presenting new opportunities – both for local vendors and for investors from a variety of markets across Asia-Pacific and beyond.”

The local market attracted more than NZ$6.7 billion of offshore investment in the five years to March 2019, with foreign buyers accounting for around half of all transactional activity for sales greater than NZ$20 million.

Commercial office real estate has been the preferred sector followed by retail, reflecting the fact that these sectors provide the scale sought after by large global investors.

Though investors based in Singapore and North America have together accounted for around two-thirds of major offshore transactions, the market has seen buyers from a diversity of locations, with other significant purchases made by investors from Australia, China, Hong Kong, Germany and Lichtenstein.

New Zealand has been on the radar among investors in countries such as Singapore, the United States and Canada for a number of years, but Johnson says potential sources of capital are set to expand further with superannuation funds, property funds and private equity from a wide range of jurisdictions now having active mandates to secure assets in New Zealand.

He expects capital flows to remain high, as New Zealand’s attractive fundamentals draw new players into the market. Most likely emerging investment sources identified by Bayleys include Japan, which with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) signatory will be allowed to purchase up to NZ$200 million of commercial and industrial assets, rather than the usual cap of $100 million, before Overseas Investment Office approval is required.

Other global property funds and private equity groups such as LOGOS, PAG and IP Morgan are also making their presence known.

ATTRACTING PRIVATE WEALTH

Among the leading drivers of global demand is the rise of high-net-worth private investors in commercial real estate.

More than one in five of the world's wealthiest people are planning to invest in commercial property this year, and New Zealand real estate is increasingly in their sights, according to new research which offered some highly-encouraging signals to local vendors.

Already a force in commercial property investment globally, private investors made US$289 billion of property transactions in the 12 months to the third quarter last year, according to the 2019 edition of The Wealth Report published by Bayleys’ global partner Knight Frank.

The report reveals that nearly a third of all commercial real estate transactions last year were made by high-net-worth individuals and 21 percent of all private wealth is held in commercial real estate investments.

New Zealand has benefited from significant cross-border capital flows into commercial property, sitting at 30th on Knight Frank's index with a total of NZ$2.6 billion (US$1.7 billion) invested last year. Foreign and local private wealth capital invested into New Zealand commercial property last year totalled NZ$500 million (US$320 million).

The new research draws on Knight Frank’s unparalleled access to private wealth. With 4,500 ultra-wealthy individuals on its global database, the company advises one in five of the world’s billionaires and has international desks in markets including China, India, the Far East and Middle East.

According to The Wealth Report, the most popular investments globally are offices, with US$330 billion invested, equating to around a third of all commercial property investment last year, while retail at $153 billion accounts for 17 percent of investment totals. Industrial, at US$139 billion, makes up 15 percent, hotels (US$62 billion) 7 percent, and senior housing and care (US$20 billion) 2 percent.

Increasingly, wealthy investors are looking not only at traditional property assets, but also growth segments such as education facilities, leisure, student housing and “last mile” logistics property, as well as targeting office investment in key tech and innovation markets.

INVESTOR APPETITE EVOLVING

Despite a darkening global economic outlook, Knight Frank's global Head of Capital Markets Research, William Mathews, says wealth creation will remain a constant throughout this year.

“We expect the appetite from private investors for commercial property will increase as the number of wealthy individuals grows.”

The global high-net-worth population is forecast to rise by 22 percent over the next five years, meaning an extra 43,000 people will be worth more than US$30 million by 2023. Last year alone, the number of wealthy individuals rose seven percent to 198,342 worldwide, the report says.

Asia has overtaken the US as the largest regional population of high-net-worth individuals. It is now home to 48,245 ultra-wealthy people, while 47,127 are domiciled in the US.

Knight Frank’s researchers expect investors to particularly target economies and sectors less prone to volatility, which bodes well for New Zealand’s ability to attract offshore capital given the relative stability and “safe-haven” status of the market.

CBD locations within gateway cities such as Auckland remain the favoured investment destinations. But, with assets in prime locations tightly-held, the search is now being extended to city-fringe and suburban locations as capital follows tenant movements out of the city centre.

Bayleys research manager Ian Little says this phenomenon has played out in New Zealand’s largest city with a number of high-profile relocations in Auckland in recent times. “Interest in these areas is increasingly bolstered as blue-chip tenants, particularly from the IT and utility industries, choose to base their head offices in amenity-rich areas outside the CBD – as seen with relocations within Auckland of prominent local tenants such as Mercury Energy, Genesis Energy, Watercare and New Zealand-based global software company Xero,” says Little.