Despite the disruption to the economy caused by the COVID-19 pandemic, the lower for longer interest rate environment drove a lift in syndication activity in 2020, that looks set to continue in 2021, according to latest figures from Colliers.
Ian Little, associate director of research at Colliers notes funds raised surpassed recent years despite withdrawn schemes.
“Over the course of 2020, approximately 25 syndicated property schemes were successfully offered to investors, a combination of single asset offerings and multi-property funds, excluding private syndications.
“The total value of funds raised across the offerings was just over $525 million in 2020, ahead of the previous high of approximately $485 million raised in 2018 and approximately $100 million more than the total recorded in 2019.
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“The total would have been higher had it not been for the disruption caused by the COVID-19 pandemic which saw a number of offerings withdrawn. These offerings, which included large scale tourism and retail property assets, would have looked to raise just under $300 million.”
“And, a number of high-profile syndications underway in 2021 set the scene for another strong year ahead, especially given the market factors in play with low interest rates and firming property yields,” says Little.
Demand for higher yielding assets has been elevated over recent years as the returns generated from bank deposits have fallen.
The current six-month term deposit rate in March 2021, according to the Reserve Bank of New Zealand, is just 0.8%.
Little says it has been the case that yields on property purchases have also tracked interest rates lower over recent years.
“With a majority of the syndication offerings brought to market over 2020 and 2021 typically generating projected annual pre-tax returns of between 5.0% and 7.0%, syndicated property has continued to offer return premiums over risk-free alternatives such as 10-year government bonds and bank deposit rates, says Little.
However, investment safety remains paramount in uncertain times, say Colliers syndication specialist Charlie Oscroft.
“Economic conditions have improved markedly since last year but given the uncertainty that the COVID-19 pandemic has introduced, investors within the syndicated property sector have placed an increased priority on security of tenure and surety of return.
“As a result, syndication companies have looked to provide investors with ‘low risk’ options by prioritising factors such as property sector, location and tenant covenant.
“The industrial and large format retail sectors have, as a result, been favoured asset classes over the year, accounting for approximately 30% of funds raised when the industrial element of mixed property portfolios is taken into account.
“Both sectors offer strong defensive fundamentals. Supermarkets, classified as an essential business, were able to trade through all restriction levels. Retail spending in DIY, furniture and electrical goods stores, for example, lifted sharply over the second half of 2020 and into 2021.
Industrial property as well as large format retail vacancy rates have held at low levels due to tenant demand underpinned by the growth in occupier services such as logistics from online retailing, growing construction activity and higher levels of spending for larger household items, DIY and electrical goods, according to Colliers Research.
And, when it comes to location, approximately 55% of funds have been raised for assets located within the commercial property market’s golden triangle of Auckland, Waikato and the Bay of Plenty. A further 15% of assets were located within Wellington.
“With low interest rates likely to persist for an extended period, the search for higher returns is likely to drive ongoing interest in syndicated property offerings,” says Oscroft.
