New Zealand’s major property funds are better positioned to ride out the current economic downturn than it was during the GFC, real estate leaders believe.
Peter Herdson, national director of the capital markets team at Colliers International, says better balance sheets, less reliance on major trading banks and low interest rates have put New Zealand’s Listed Property Vehicles (LPVs) in a good position.
“Longer weighted average lease terms (WALTs), a higher number of structured rental contracts, lower vacancy rates, and a more moderate supply pipeline are also key strengths,” he says.
The re-introduction of depreciation on building structures, which was among the New Zealand government’s tranche of business relief measures, has provided another benefit,Herdson says.
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He argues that the wider property sector stands to benefit from the resilience of New Zealand’s LPVs.
“While LPVs typically have a higher calibre of properties than some segments of the private property sector, the stronger fundamentals should provide the wider market some comfort and useful insights on how the overall sector is placed to weather the current market uncertainty over the medium-term.”
Chris Dibble, head of research at Colliers, says New Zealand’s LPV sector typically has gearing of around 30 per cent, compared with typical maximum bank covenant requirements of around 50 per cent.
“This, along with the size of available bank facilities and issued bonds, highlights the sector is well placed to fend off any breaches if asset values do decline.
“Another important fundamental for the listed and private commercial property market is the trend in recent years of record low vacancy across most markets, which will help insulate the sector from any potential uplift in vacancy rates that could occur.
“Further, in comparison to the GFC and the economic shocks of the 1990s, the supply pipeline is more moderate.”
Herdson says longer WALTs and structured rents are among other important changes over the past few years.
“These measures help with short-term variations in rental cashflow and provide better medium-term prospects.”
Herdson says the quality of tenants will be integral, with ‘pandemic-proof’ businesses providing the best covenants.
“These tenants include supermarkets, large format retailers, logistics and industrial users – particularly those associated with primary industries and the supermarket supply chain – as well as core offices.”
Colliers International’s latest monthly research report suggests there will be noticeable differences within each asset class.
Office
Rising unemployment rate forecasts will likely lead to an impact on office sector space occupancy and absorption rates, but to what extent remains unclear. The current record low vacancy rates in many office markets nationally are seen as a key insulator, and will likely assist with future market strength.
Further, moderate supply pipelines in comparison to previous downturns will assist the sector’s demand and supply balance over the medium term.
Some variances between occupier groups are emerging. Government, IT and health sectors are clear beneficiaries from the recent changes. There is also resilience in insurance, legal and accounting sectors. Travel, retail, hospitality and other associated occupiers are feeling the greatest challenges.
Industrial
Industrial continues to be regarded by many as more resilient than other sectors under current market conditions.
Growth in logistics, which was already increasing the demand for space, is an important driver of confidence. Businesses involved with servicing rural and agribusiness sectors are also benefiting and adding to the sector’s demand.
An extremely low vacancy rate, limited access to land for development activity and a modest supply pipeline are also important positive fundamentals.
The expectations for construction activity vary by sector, but public works and infrastructure activity through ‘shovel-ready’ projects should boost sector activity.
Retail
While the lockdown has impacted spending, the move to Alert Level 3 has made more services and products available through contactless payments and click and collect. This will bring a rise in spending activity.
A number of retail stores and shopping centres are undergoing reconfiguration to get operational under Alert Level 3. Changes to the retail landscape, and the need to establish a strong online presence, is expediting some retailers’ plans to venture into a more omni-channel retail world in the future.
There is unlikely to be a significant expansion of existing retail networks over the next 6-12 months. Many retailers will be focussing on what the current trading impact is on their current store network.
Moving forward
Herdson says recovery will initially be domestic-led, while a trans-Tasman bubble is a real hope.
“History tells us that in volatile times such as these, opportunities arise. Money in the bank, while relatively safe, offers returns that very few will be prepared to live with in the medium term.
“Property in both direct and listed forms will remain appealing. Assets are often mispriced in volatile times for many reasons, creating opportunities for those ready to move.
“The sectors that appear to be attracting attention at this early stage include prime land parcels, such as the recently sold Caughey Preston Trust site in Remuera, along with industrial/distribution and prime office assets.”
International investment is likely to bounce back with renewed vigour once certainty returns to global markets.
Richard Kirke, International Sales Director at Colliers, says offshore funds are amassing significant capital reserves for investment, commonly referred to as ‘dry powder’.
“New Zealand is viewed by many as a safe haven, but there is some contemplation on how we might perform economically after the lockdown.
“Several funds have raised opportunistic capital in the last few weeks, that will be deployed in the next 12-18 months. Whether New Zealand benefits from this capital will depend on how quickly our economy re-establishes itself along with government policy developments.”
