Major property funds better placed to ride out this downturn than the GFC

Capital markets

New Zealand’s major property funds are better positioned to ride out the current economic downturn than it was during the GFC, according to Colliers International experts.

Peter Herdson, National Director of Colliers’ Capital Markets team, points to a number of positive factors.

“Better balance sheets, less reliance on major trading banks, and low interest rates have put New Zealand’s Listed Property Vehicles (LPVs) in a comparably strong 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.”

Herdson 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.

He says 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, Research and Communications Director 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.”


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Peter Herdson

National Director | Capital Markets

Auckland CBD

In 1993 Peter returned to New Zealand from the United Kingdom with several years’ experience in property management and development. During this time, he worked for Vanson Developments (Richard Branson´s property development company) for two years, and in investment and management for Fuller Peiser (Rolls Royce and Vickers Pension Funds). Upon his return to New Zealand, Peter joined Colliers International (NZ) Limited, where he has been ever since.

Peter now leads the Colliers International Capital Markets division, based in the Auckland CBD. The team is proud to have established a new approach to collaborative working within their division, a first the New Zealand marketplace. 

The “Power of Five” approach with the Capital Markets team has driven exceptional outcomes for client service since 2007. The team has adapted a charter unique in the market, with over 100 years of combined experience. The personal and professional networks of 5 directors operating as a cohesive team across all projects, provides maximum leverage and market coverage for our vendors. It ensures an acceleration of all our clients success.

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Chris Dibble

National Director | Colliers Partnerships, Research & Communications

Auckland CBD

My Colliers Partnership priorities focus on support initiatives that drive collaboration, best practice learning, cost efficiencies and growth opportunities across the wider Colliers International New Zealand franchise network. I also oversee the collaboration and delivery of award-winning research reports and communications for Colliers. With over 13 years of experience and university qualifications in economics, geography, marketing and property. I have a multi-disciplinary approach that assists a broad range of clients and internal stakeholders. I am a regular presenter and market commentator, often discussing the latest insights on current and future property trends. I also work with in-house and external writers to curate an audience-focused content delivery strategy for Colliers.

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Richard Kirke

Director | Capital Markets

Auckland CBD

Richard is responsible for the promotion of New Zealand property to international investors, leveraging of his relationships developed in executive positions during his near 8 years in Hong Kong, as well as assisting to grow the company’s nationwide Rural and Agribusiness agency capability.

Richard began his real estate career in 2004 with CBRE, in the five years he spent with them (before leaving to run Colliers Hong Kong business in 2008) he was involved in many notable transactions including the sale of the Lion Nathan site in Newmarket for $162m, the sale of the GE & BNZ Britomart properties on behalf of Manson’s to the German fund HIH and portfolio sales, including the successful auctioning of 16 National Bank Branches across New Zealand.

During his time as MD of Colliers Hong Kong he was involved in the sale of 50 Connaught Road on behalf Apollo Group (a New York based Hedge Fund) to the Agricultural Bank of China for $US632m.

Richard was the Managing Director of Colliers Hong Kong office for six years from 2009-2014. During this time he was an active participant in several high value transactions and developed broad relationships with both Asian investors and colleagues across the region.

In late 2014, Richard agreed to run CBRE’s Asia Pacific Capital Market business, including their Capital Advisory (Real Estate Investment Banking) business, this further added to his knowledge of real estate investors, particularly in greater Asia.

As a senior executive of Colliers for 6 years in Hong Kong, Richard has strong personal relationships with Colliers personnel across the globe.

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