Of all the various influences that have combined to shape recent capital flows into New Zealand, one continues to stand out: Overseas funds bearing large stockpiles of accumulated cash are coming to our shores and investing in property.
So why property, and why New Zealand?
In a world of low-income yields, investors are searching for opportunities to enhance returns. This has meant they are typically doing one of two things - either moving up the risk curve (so maintaining absolute income returns) by reducing their exposure to bonds, or seeking out alternative less traditional forms of investment. Increasing investment in property has been a beneficiary of these changes. Property has some attractive characteristics. It offers an attractive yield, and provides a balance between the stability of fixed income and the returns associated with shares. It can also offer a hedge against inflation should that eventuate.
This increased allocation to property, and increased competition for assets, has resulted in international investors migrating away from their home markets into new geographies and new asset types.
Historically overseas buyers haven't played a major part in New Zealand, with the relatively small size of our commercial property market making it difficult to justify the associated establishment costs. But with traditional markets becoming saturated, New Zealand has matured into a destination for investment.
Buyer demand, from both international and local investors is generating an extremely healthy and liquid market. Total sales (both domestic and international) has exceeded $2.5B per annum for each of the past five years – but it is the $8.7B spent by offshore investors since 2014, that has really changed things.
As American writer Mark Twain once said: "Buy land, they're not making it anymore." When it comes to New Zealand real estate, his fellow countrymen have listened.
In 2018, US-based funds were the main participants in the market, purchasing over $1.03b of NZ property and accounting for over half of the $1.83b of overseas investment that year. Asian investment firms placed second, investing $381m.
This US influence has been primarily felt in the office markets, which remains the preferred investment sector due to the availability of scale. The largest sale was Goodman's VXV portfolio of nine office buildings in Auckland's viaduct harbour which sold to US private equity firm Blackstone for $635m – at an initial yield of 6.6%. US-based Invesco also purchased 125 Queen Street for $214m, while Spark Central Wellington sold for $197m – Wellington's largest ever single sale.
New Zealand's prime office market still offers relative value compared to other key global office markets, so expect more to arrive.
Transactions like these represent a paradigm shift for our market. These participants are here and they are here to stay. This increased competition in our market is also changing things in a fundamental way.
Traditional "Core" investment funds – those chasing large passive assets offering stable yields and long leases (think large scale office buildings) are having to rethink the way they do things. With low yields prevailing, these buyers must also look to enhance forecast returns by identifying (measured) development angles.
Meanwhile "Opportunistic" funds – those seeking shorter-term gains and profits are also having to move their return expectations down, given high competition. For overseas investors, this means an increasing reliance on the skill and knowledge of potential local partners.
As a result, the line between these two investment strategies is becoming blurred – with both converging in on the same "value-add" space. Investors are having to look at generating returns from working their assets rather than just relying on leverage or rental growth.
With assets in main centres appreciating strongly, domestic interest will expand to regional centres. Expect to see ongoing development and value firming in regional markets such as Tauranga, Hamilton, Dunedin and Nelson.
It is an exciting time to be a commercial property investor in New Zealand!
Source for Statistics: CBRE Capital Markets Review 2018