Property Prices: The new national sport?
By Brent Buchanan, Head of Direct Property
07 November, 2017
In New Zealand monitoring house pricing is virtually a national sport. Even a minor change can create as many media headlines as an All Black match result. The response is equally emotive with rising values and talk of an affordability crisis creating alarm and dismay to those on the sidelines, while having the homeowners watching their net worth soar. Of course any fall results in equal alarm. It’s no surprise given that Kiwi’s love their houses.
You might not know it but at Fisher Funds we enjoy the talk of property as much as you do. As well as having exposure to listed property assets though our Property & Infrastructure Fund, we have direct interests in commercial property. This forms part of the diversified portfolio for our KiwiSaver members.
Like we do when we invest in shares, we take a long term approach investing in property; owning a number of high quality retail, office and industrial properties that are occupied by well-known companies on long term leases. Our in-house team actively manages these properties. While our investment decisions are based heavily on physical factors such as location and quality; we also place great emphasis on quality of earnings from the properties we own. We avoid exposing ourselves to tenants who may not pay their rent dependent on discretionary spending, preferring instead suppliers of essential items such as food and clothing. This is to mitigate against the risk of a consumer spending fall that would impact retail sector, and flow on to industrial (including manufacturing and logistics).
So what’s the current outlook for the commercial property market and how does this relate to our beloved residential properties? Recent releases from Quotable Value have confirmed what those of us living in Auckland can see for ourselves, prices are soft and have fallen over the past year. The same can be said for the commercial sector. In fact we believe the slow down was seen in the commercial sector first. Regardless of which market ran out of steam first, for both markets a slow down changes the focus of the game.
At the height of the market, capital gains were the player of the day. With prices appreciating rapidly, the focus on rental yield tended to take a back seat. So with capital gains likely to hit the bench for a while it is the rental income that will provide the primary return for investors.
This is where it gets interesting as for a time it seemed as though the run on residential property prices was as unstoppable as an All Black forward pack. Of course rents did not rise proportionately to values, meaning yields have suffered.
This is where there is a key difference between the residential and commercial rental markets. Commercial property currently delivers a 5-7% yield depending on the specifics of the property where many residential properties are yielding closer to 2-3%. If we are right and capital values remain flat, that materially changes the outlook for the residential property market. Some caution is warranted.
Within our commercial property portfolio our focus is on ensuring the quality of our tenants and finding ways to add value to our existing portfolio. In a more challenging environment this will help us generate attractive returns. We remain comfortable with our game plan.