Has property had its day in the sun?
Or does it need some more sunscreen? Property, it’s a New Zealand love affair that has 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. Who better to ask than Mint’s property portfolio manager Carlie Eve.
Friday, December 6th 2019, 7:00AM
by Mint Asset Management
Carlie, before we look at how the property market has been going tell us a little bit about yourself, the role you have at Mint and what you do in your spare time.
My role at Mint includes managing the listed property funds and researching the property, building, retail and consumer sectors. I have been at Mint for over 13 years now, with the earlier part of my career spent at Goldman Sachs JBWere, GE Capital (London) and Kiwi Property Group.
I have two teenage children who keep me busy outside of work.
Looking at property, it has had an incredible run over the past few years, much like domestic equities, however the last 12 months have been stellar. What have been the key contributors to the performance and what’s driving the sector?
Over the last 10 years (to the end of 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 out-performance 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.
It seems, with falling interest rates, the hunt for yield is paramount for investors looking for better streams of income. What are some of the areas that investors need to take into consideration when investing into listed property companies?
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 like earnings growth, portfolio vacancy risk, earnings mix (eg funds management fees versus rental income), 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.
A number of listed entities have funds management businesses which have quite different characteristics, and can have quite lumpy earnings depending on the timing of opportunities. Our investment process analyses these factors in great depth, and along with our industry knowledge and interactions with the listed entities formulates our view around value.
Given you have a mandate to invest into the Australian listed property market what has been the differences in performance between New Zealand and Australia over the past few years?
The performances of the two markets have little correlation despite both being sought after investment classes in this low interest rate environment. Over the last year the NZ listed property sector has outperformed Australia by over 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 is it important to have an Australian allocation to this sector for New Zealand investors and how do you see their market going forward compared to New Zealand?
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.
The underlying sector trends also differ in Australia, providing different cycle stages and growth phases to exploit and look for structural change elements that add value to the growth profile.
From a sector perspective what has been the least and most attractive over the last 12 months?
The phrase “retail is dead” has become all too common of late and in our view is being overly negative about an asset class which has had its challenges as online shopping has grown, but has also evolved into more than just a traditional shopping experience. The number of apparel stores in malls continues to decline in favour of food and beverage and entertainment options.
Quality, well-positioned shopping centres continue to experience strong rental growth and high levels of occupancy.
Globally the most attractive sector remains logistics/industrial, again due to the online phenomenon that has reshaped the retail landscape over the last 10 years.
However, investors need to remember that not all industrial properties are logistics and that there is a high level of exposure to general economic conditions amongst industrial tenants. While we are beginning to see more positive rental growth in Australia and New Zealand in the industrial sector it has not had the best sector performance over the past few years.
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%, and an average premium to NTA of around 17%. 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 eight 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, with an average dividend yield of 4.5% (a historically large spread to 10 year bonds), and sector average gearing of less than 30%.
The sector is trading at an elevated premium to NTA of around 45%, however this is heavily skewed by the large entities with funds management businesses (not fully recognised in the NTA). 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.
The RBNZ surprised the market this month by not lowering rates, however highlighted that the risks “in the near term were tilted to the downside”. The RBA also held rates but retained an easing bias. Any further declines in domestic interest rates will continue to fuel demand for yield sectors like property and underpin ongoing returns from the sector.
Given that view, from an active manager's approach what are you doing to take advantage of these opportunities (and threats) and what other conditions will affect property going forward?
We will continue to use the same investment process which has been developed and refined over many years, and continue to do in depth research of the underlying sector fundamentals in order to exploit any key themes across different sectors.
As active managers we are able to fully understand what is driving each entity and how that will be reflected in the investment fundamentals and ultimately the amount of each stock owned in our portfolios.
Mint Asset Management is an independent investment management business based in Auckland, New Zealand. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement at mintasset.co.nz
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