Will NZ property fund returns keep building, or will they crumble?

Article written by Carlie Eve – Property Portfolio Manager, Mint Asset Management

Property – it’s a New Zealand love affair that’s created a lot of wealth over recent years in the residential market for Kiwis; but what’s been happening where the big guns play in the listed market?

The Listed Property Sector has had an incredible run over the past few years, in particular over the last 12 months.  As Portfolio Manager of Mint’s Listed Property Portfolio is has been great to see the sector post such a strong performance.

Key contributors to the performance – what’s driving the sector?

Over the last 10 years (ending November 19) the NZ listed property sector has returned 13.2% p.a., which is similar to the S&P/NZX 50 performance.  Over the last year the property sector performance has been particularly strong with a return of 30.0%, ahead of the S&P/NZX 50 return of 28.2%.

The key driver of this outperformance has been the low interest rate environment, with investors seeking higher yielding and more stable investments.  Prior to the amazing run over the last year, the longer-term (10 year) average return for the listed property sector was still a robust 9 – 10% p.a. reinforcing the longer-term attractiveness of the asset class.

What do investors need to consider when investing in Listed Property?

It is important that investors understand the underlying fundamentals of the listed property entities.  Investing purely on the basis of the best yield, the price relative to net tangible assets (NTA), or the most attractive sector ignores other key value drivers. These include earnings growth, portfolio vacancy risk, and the quality of management and governance.  The strength of the balance sheet also needs to be evaluated, along with any potential added value or development strategies. Our investment process at Mint analyses these factors in great depth, and along with our industry knowledge and interactions with the listed entities formulates our view around value.

Mint’s mandate is to invest in Australian Listed Property as well – How does Aussie compare?

The performances of the two markets have little correlation despite both being sought after investment classes in the low interest rate environment.  Over the last year the NZ listed property sector has outperformed Australia by 4.2%.  Over the last three years the per annum performance is a little closer, with the NZ listed sector up 16.1% and Australia 13.6%.  

Why it’s beneficial to have an Australian allocation to this sector for New Zealanders

The opportunity set is quite different across New Zealand and Australia.  We can get exposure to a number of additional sectors in Australia, including residential, hotels, international property and childcare.  Clearly the Australian property sector is also a lot larger and more liquid.

Looking forward – can we expect to see these returns continue?

There are a number of factors that need to be considered when thinking about future returns.  The New Zealand listed property sector has an average cash yield of an attractive 4%. Company balance sheets are largely in good shape following a number of capital raisings, and occupancy levels are high, with earnings protection through a weighted average lease term of 8 years across the sector.  The outlook for rental growth remains positive, and property valuations (in general) continue to increase.  The fundamentals in Australia are similarly attractive. So underlying fundamentals remain positive across both markets and should support ongoing positive performances.  The interest rate environment is expected to stay low, with a number of central banks remaining in easing mode. Any further declines in domestic interest rates will continue to fuel demand for yield sectors like property and underpin ongoing returns from the sector.

*Past performance is not a guarantee of future returns. InvestNow does not provide individual financial advice. If you require financial advice please contact a financial advisor.

Will NZ property fund returns keep building, or will they crumble?

Article written by Carlie Eve – Property Portfolio Manager, Mint Asset Management

Property – it’s a New Zealand love affair that’s created a lot of wealth over recent years in the residential market for Kiwis; but what’s been happening where the big guns play in the listed market?

The Listed Property Sector has had an incredible run over the past few years, in particular over the last 12 months.  As Portfolio Manager of Mint’s Listed Property Portfolio is has been great to see the sector post such a strong performance.

Key contributors to the performance – what’s driving the sector?

Over the last 10 years (ending November 19) the NZ listed property sector has returned 13.2% p.a., which is similar to the S&P/NZX 50 performance.  Over the last year the property sector performance has been particularly strong with a return of 30.0%, ahead of the S&P/NZX 50 return of 28.2%.

The key driver of this outperformance has been the low interest rate environment, with investors seeking higher yielding and more stable investments.  Prior to the amazing run over the last year, the longer-term (10 year) average return for the listed property sector was still a robust 9 – 10% p.a. reinforcing the longer-term attractiveness of the asset class.

What do investors need to consider when investing in Listed Property?

It is important that investors understand the underlying fundamentals of the listed property entities.  Investing purely on the basis of the best yield, the price relative to net tangible assets (NTA), or the most attractive sector ignores other key value drivers. These include earnings growth, portfolio vacancy risk, and the quality of management and governance.  The strength of the balance sheet also needs to be evaluated, along with any potential added value or development strategies. Our investment process at Mint analyses these factors in great depth, and along with our industry knowledge and interactions with the listed entities formulates our view around value.

Mint’s mandate is to invest in Australian Listed Property as well – How does Aussie compare?

The performances of the two markets have little correlation despite both being sought after investment classes in the low interest rate environment.  Over the last year the NZ listed property sector has outperformed Australia by 4.2%.  Over the last three years the per annum performance is a little closer, with the NZ listed sector up 16.1% and Australia 13.6%.  

Why it’s beneficial to have an Australian allocation to this sector for New Zealanders

The opportunity set is quite different across New Zealand and Australia.  We can get exposure to a number of additional sectors in Australia, including residential, hotels, international property and childcare.  Clearly the Australian property sector is also a lot larger and more liquid.

Looking forward – can we expect to see these returns continue?

There are a number of factors that need to be considered when thinking about future returns.  The New Zealand listed property sector has an average cash yield of an attractive 4%. Company balance sheets are largely in good shape following a number of capital raisings, and occupancy levels are high, with earnings protection through a weighted average lease term of 8 years across the sector.  The outlook for rental growth remains positive, and property valuations (in general) continue to increase.  The fundamentals in Australia are similarly attractive. So underlying fundamentals remain positive across both markets and should support ongoing positive performances.  The interest rate environment is expected to stay low, with a number of central banks remaining in easing mode. Any further declines in domestic interest rates will continue to fuel demand for yield sectors like property and underpin ongoing returns from the sector.

*Past performance is not a guarantee of future returns. InvestNow does not provide individual financial advice. If you require financial advice please contact a financial advisor.

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