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Property investment outperforms share and bond markets for cash returns

Tags: Property Insight Research Residential

Property assets have come out tops for delivering the best investment returns for New Zealanders over the past decade, according to new research.

The value of shares, gold, bonds, and real estate in New Zealand were tracked over a ten year span – punctuated by the Global Financial Crisis between 2008 – 2010 with real estate taking out the top three places for investor returns.

The data compiled by Bayleys Research said real estate investment bridged multiple options – and all delivered above-average returns, taking into account not only capital growth on the assets, but also rental returns and dividend pay-outs.

Bayleys Research senior analyst Goran Ujdur said property, both in terms of bricks and mortar, and through stock market-listed entities, had been amongst the primary investor targets leading to high levels of capital appreciation.

“The best performing asset class was commercial property buildings – such as offices, warehouses, and shopping centres, with an annual return of 10.1 percent,” Mr Ujdur said.

“The second best performing asset class was stock-exchange listed property vehicles at 8.7 percent. Residential property came in third - with annualised returns of 8.4 percent on a national level.

“Falling interest rates, rising investor demand, high levels of net migration and supply shortages especially in Auckland and Christchurch have underpinned this performance.

“Location has also been a key determinant of residential performance with a wide disparity of returns across the country. When broken out of the national figures, Auckland was a standout performer – returning an average of 10.5 percent annually for the past decade.”

Outside of property investment, Mr Ujdur said gold snuck in at fourth spot – delivering an annualised return of 8.37 percent per year made up purely of capital growth, while shares came in at 6.3 percent over the 10 year period - reflecting the more volatile nature of the share market, especially during the Global Financial Crisis between 2008 and 2010.

He said shares had however bounced back particularly strongly over the past five years – at around 13.3 percent since 2010 – doubling average returns.

Government bonds were next, with annualised returns of 6.2 percent, and cash deposit interest rates trailing well below the average at 4.6 percent. Mr Ujdur said with cash savings producing very little in the way of returns, investors had been forced to seek out higher yielding assets such as shares and property to stay ahead of inflation.

“Mass money printing – by the likes of the US Federal Reserve and the European Central Bank - has had a major negative impact on the performance of term deposits and cash returns,” he said.

“By comparison, coming off a low base post the GFC, ‘growth’ assets such as real estate have had a stellar run, especially over the past five years, where they have generated double digit returns. This is all the more spectacular as inflation has remained very low – which had a dampening effect on bank deposit rate returns,” he said.

“Share market-listed property companies have had a tremendous run over the last five years and especially so over the last 12 months, where they recorded the strongest returns amongst all major investment types at 18.5 percent.

“Our research took a ‘national’ approach to residential property rather than just Auckland. However, if you put the Auckland residential market returns under the microscope in isolation, then they grew by around 25.1 percent in the year ending September 2015.”

Mr Ujdur said that over the past three years in particular, residential property had performed strongly - driven primarily by value appreciation.

“Gross rental returns, on the other hand have been subdued – and now are generally below four percent yields in greater Auckland where ‘investors’ have been focussed on capital appreciation. In provincial centres, gross rental yields are a slither higher at around six to eight percent. The smaller the city or town, generally, the higher the yield, which reflects the proportionately higher risks of tenanting the property.

“More recently with increasing numbers of Aucklanders feeling ‘wealthier’ due to rising levels of home equity, we have seen a spill-over of demand into other regional markets, especially those closer to Auckland such as Hamilton, Whangarei, Taupo, and in particular Tauranga.

“On the other hand Wellington’s residential returns have remained relatively subdued over the last 10 years. And in the South Island, Christchurch experienced a slow and steady improvement in returns as the rebuild took hold, but more recently has eased as supply levels increase.”

Data for the research was compiled through multiple channels – ranging from the Real Estate Institute of New Zealand and asset consultancy Melville Jessup Weaver through to investment advisory house Forsyth Barr, and the Ministry of Business Innovation and Employment.

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