New Zealand commercial property outshone the global market last year according to figures by MSCI which measures total returns from investment-grade real estate around the world. Bayleys Research senior analyst Goran Ujdur tracks how the market has b
New Zealand commercial property produced a total return (income plus capital growth) of 11.3% in 2014 – outperforming a global average of 9.9% – according to MSCI’s analysis of global commercial property performance.
New Zealand joins a small group of largely English speaking countries which have recorded the highest annualised returns (in local currencies) amongst major developed nations over the past five years. Based on MSCI numbers, New Zealand, Australia, the US, Canada and the UK all recorded double digit returns while most European and Asian markets recorded low to mid single digit returns.
Latest MSCI numbers for the year to March 2015 year, based on a valuation of a portfolio of close to $13 billion of predominantly higher value property, show total returns for all types of New Zealand commercial property (office, retail and industrial) averaged 11.7%.This is above the long term New Zealand average of 10.6% but still well below the highs achieved before the Global Financial Crisis of 24% in 2007.
Given the current strong demand for commercial property from both occupiers and investors, especially in Auckland, it is not difficult to envisage further performance upside. Capital returns in particular, are likely to form a larger component of total returns over the remainder of the current upward cycle. For the 12 months to March 2015, they were already up 50% from an average of 2.6% to 3.9%.
Capital growth is strongest in Auckland, New Zealand’s biggest city, at 7.3% for CBD office premises to give a total return of 14.8% in the March 2015 year and 5.1%for retail property (total return 12.4%). Capital returns of 2.7%-7% were recorded across Auckland’s main industrial suburbs.
There are no signs of a slowdown in the wave of money, both local and off-shore, 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.
Reflecting these conditions, income yields across all the major New Zealand commercial property sectors – office, retail and industrial – have firmed between 100 to 150 basis points over the last three years.
Recent Bayleys Research vacancy surveys are all confirming just how tight supply has become across all sectors. 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 in the remainder of 2015 and into 2016.
One of the major challenges for the New Zealand market is a shortage of high value investment grade stock. Most of the existing prime properties are owned by a handful of large listed property vehicles.
Going forward we could expect to see more joint ventures emerging between larger local players and major off-shore groups seeking New Zealand exposure such as sovereign wealth funds and major institutional investors. This provides a way for local participants to reduce specific risk exposures while still retaining control and freeing up funds for further growth enhancing opportunities such as development.
It also allows larger off-shore groups to take substantial, longer term positions in existing institutional grade assets and/or participate in new development activity. This trend has already become evident with the announcement late last year of a joint venture between GIC, Singapore’s sovereign wealth fund, and Goodman Property Trust for NZ$313 million worth of property assets in Auckland’s CBD. Around the same time, GIC also entered into another joint venture with Australia’s Scentre Group involving five New Zealand based Westfield shopping centres valued at NZ$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 Portfolio of 18 properties with a value of around NZ$1 billion last year. Chinese company Shanghai Pengxin is also building up a large portfolio of commercial and rural properties in New Zealand. This may be the beginning of a new wave of high end investment into New Zealand.