A combination of high commercial property returns (relative to other developed markets) and the recent fall in the NZD has triggered a wave of international investor interest in New Zealand.
The flow of funds has, over recent months, shown signs of accelerating with over $1.3 billion dollars of overseas investment already committed to New Zealand commercial property over the first half of 2018. This figure has already exceeded the total sales value recorded in each of the last three years albeit falling short of the record 2014 total which saw over $2.5 billion of assets being purchased by overseas interests.
A refocus on the Asia Pacific region by a growing number of global groups – Sovereign Wealth Funds, wholesale funds and global REITs – is seeing allocations to the region rise. For the first time we are seeing multiple approved mandates for New Zealand, as opposed to select opportunistic plays as were common in the past. Helping New Zealand’s case is the continued weight of capital in Australia seeking further investment but struggling to find domestic opportunities which meet their return hurdles. Many of these Australian players are now casting a wider net and New Zealand’s attractive returns are firmly in sight.
In addition, a changing regulatory backdrop in New Zealand, which, will limit the ability of overseas entities to purchase agricultural land and residential property is likely to result in an increased demand for commercial property assets.
Global funds making their presence felt
The recent purchase, by the Blackstone Group, of a Wynyard Quarter office portfolio for a reported sum of $635 million is the latest example of the type of opportunity which such funds prefer. In 2014 the Canadian Pension Plan Investment Board purchased a portfolio of 18 properties from AMP for just over $1 billion. In the same year GIC, the Singapore national superannuation fund, invested $1 billion when it purchased a 49% share in 5 Westfield retail malls.
An analysis of sales of over $20 million from 2014 onwards clearly illustrates the impact of international investors with overseas funds accounting for 50% of the total sales value.
Five countries – Singapore, Canada, US, Hong Kong/China and Australia – accounted for 89% of all off-shore buying since 2014. Purchases by Singapore dominated (31%), which may reflect the country’s lower total property returns (circa 6%) relative to NZ and exchange rate differentials at the time of purchase.
New Zealand Generating High Relative Returns
Latest figures published by MSCI show the average annual return generated by commercial and industrial property across New Zealand to have been 10.5% over the year to March 2018. These figures continue a longer term trend which has seen the asset class generate double digit returns over 3,5 and 15 years.
On a relative basis, NZ property returns are very much in line with those currently being generated in Australia and higher than those prevalent in many other mature markets in North America, Europe and Asia.
While yield compression has certainly been evident in New Zealand over recent years they continue to sit above those which can be achieved from commercial property in many other first world countries. As a result, total returns generated by New Zealand commercial property remain attractive, which has seen increased levels of interest in the country as an investment destination.
A Changing Regulatory Backdrop
New Zealand’s government is currently passing new legislation (The Overseas Investment Amendment Bill) through parliament aimed at limiting the ability of overseas investors to purchase land categorised as “sensitive” which, for the first time will include residential land. The purchase of residential properties will also be restricted. In order to assist in making large apartment developments viable, overseas buyers will be permitted to purchase units “off the plan” but upon completion the units must be tenanted or sold. Agricultural land is also categorised as sensitive and, as such, there are limited circumstances under which overseas purchasers can buy the land.
Overseas parties wishing to purchase sensitive land must apply to the Overseas Investment Office (OIO) for consent and as outlined above consent will be harder to obtain under the new legislation than it has been in the past.
As a general rule, however, OIO approval for commercial property assets will only be required if the purchase price of the asset(s) exceeds $100 million. Such consent has , as a general rule, not been hard to obtain. To date, there have been no indications from the New Zealand government that consent for such purchases is going to be subject to more restrictions than has been the case in the past.
The impact of the changes to the regulatory backdrop is likely to be a further lift in interest for commercial premises, particularly in respect of property in the up to $5 million range as funds are diverted from residential purchases.
Major Sources of Overseas Investment