It’s no surprise that we’ve seen investors flooding into property funds, given the consistent performance of the asset class over the last 18 months. Our October 2019 fund performance report show returns far superior to any other asset class – 7 out of the 10 top performing funds on InvestNow were property funds over the 12 months up to October.

Over this period the Smartshares NZ Property Fund lead the pack, returning 35.48% – 1.1% more than second place Salt Enhanced Property Fund at 34.38%.

Of the equity funds on InvestNow, which have historically been the highest performing asset class, the best 12-month returns are sitting at just 26.44%, nearly a whopping 10% below our Smartshares pack leader.

Over the last 6 months, the percentage of InvestNow customers holding property funds has almost doubled – from 17% to 33%. InvestNow customers currently hold almost $25m in the 10 property funds available.

The NZ listed property market has been on a tear over the last year or so with the index up about 36% for the 12 months to the end of September, according to investment research house, Melville Jessup Weaver – although it has eased somewhat since then.

While NZ equities in general (and globally, too) have experienced a stellar year, the listed property index outperformed the broader local shares benchmark (the S&P/NZX 50) by 100% over the 12 months to September 30.

Primarily, the demand for listed property stocks has been driven by the ongoing search for yield in the increasingly low-interest rate world: NZ listed real estate companies – which invest mostly in local commercial property – typically pay out larger dividends than other NZX companies.

At the same time, commercial property values have also increased, underpinning listed real estate company share prices and further fueling investor demand.

According to the latest Reserve Bank of NZ (RBNZ) ‘financial stability report’, the NZ commercial property sector “has also seen changes in market dynamics and new entrants”.

“In an environment of low interest rates, investors have been searching for yield. International interest in New Zealand commercial property has remained high, reflecting relatively attractive yields,” the RBNZ report says. “There is also anecdotal evidence that domestic household investors have increasingly sought commercial property investments.”

In short, investors of all stripes have turned to NZ listed property for regular income and its apparent safety as a store of capital.

As with all rapid rides up, the effects of gravity become more pronounced the higher you go.

The performance of commercial property is also intimately linked with wider economic factors, which have shown some signs of weakness in NZ of late.

The RBNZ financial stability report notes: “Commercial property prices are sensitive to changes in interest rates. While yields have been falling they remain attractive, particularly in the current environment of low interest rates.”

At the same time, the RBNZ says the local commercial property “price-to-rent” ratio has continued to rise “supported by low interest rates and low vacancy rates”.

“While these factors are helping to mitigate the imminent risk of a sharp repricing, the overall trend is contributing to a build-up in the vulnerability to future shocks, such as unexpected increases in interest rates or an economic downturn,” the report says.

But the RBNZ isn’t signaling a market or local economy crash any time soon. This doesn’t mean you should jump into the next property fund that comes your way.

We all know that past performance is no guide to future performance.  And not all funds are the same so it’s essential to do your homework before choosing.

• Look at the Product Disclosure Statement (PDS)
• What/where does the fund primarily invest – What are the top 10 holdings? Does the investment strategy align to your risk appetite?
• Consider the fees – weigh up the fees vs return. Is it worth it?
• Management style – Active or Passive – passive aim to track the index and active aim to beat a benchmark. Active usually costs more in fees.
• Consider your risk tolerance – Property funds are generally high risk, but they can also sit in a medium risk category – check the PDS risk rating.