Improved investment interest in alternative and value-add asset classes
Improved investment interest in alternative and value-add asset classes
| 29 June 2019
New Zealand’s commercial property market is demonstrating a depth of maturity. This, coupled with the current weight of investment capital, has significantly improved liquidity levels across a variety of asset classes. Capital confidence in New Zealand is high and investors are branching out well beyond the traditional commercial investment avenues looking for more portfolio diversification, according to CBRE New Zealand.
Richard Carr, Senior Research Analyst for CBRE, says that liquidity improvements have been gaining momentum for a few years and seem set to continue. This momentum continues to support vendors and purchasers alike as market activity and enquiry at strong levels supports commercial property transactions. With unmet demand in the market, asset values are expected to continue increasing in 2019.
“CBRE consistently talks about the ‘dry powder’ available for deployment into real estate around the world and our latest estimates have in excess of $100 Billion available for investment into the Asia Pacific region, which includes New Zealand. The mega investors such as Singaporean GIC, Canadian PSP and Blackstone led the charge with large scale confidence in New Zealand and the copycat effect is quite noticeable”.
Brent McGregor, who heads CBRE’s Capital Markets team in New Zealand, states that the last 12 months have seen an average of 6.1 offers per sales campaign, meaning that for every transaction that occurs, there are 5 bidders still looking for a deal. “The average number of bids per deal is still stable to increasing,” he says, “with the latest observation being that the locals have started to successfully compete with the historically more aggressive offshore bidders.”
Carr says, “We’ve witnessed increasing demand from a range of investor groups, not just locally but from around the world and not just for traditional office, retail and industrial assets. Local investors are particularly active and competitive. This is not just high net worth private investors, but also syndication groups.”
Syndicators have ramped up recently, with more than $440 million of acquisitions in 2018. This demand has continued into 2019 with sustained demand seeking a range of assets in a variety of locations. Syndicators have usually been more focused on the Auckland market, but have recently been looking further afield to Wellington, Christchurch and Tauranga to find opportunities.
Carr says, “The low interest rate environment appears to be here to stay, which will continue to support yield compression. People are having to look further afield than the traditional term deposits which is where syndication increase accessibility into the commercial property market where leveraged distribution yields sit between 6% and 9%.”
At this point in the cycle, Carr says that liquidity confidence – the ability to enter and, sometimes more importantly, exit a market – is helping investors to realise capital and find more purchasers when they want to sell.
“When capital demand is strong, relative returns drive investment decisions and influence liquidity. Buyers are constantly assessing the returns available in NZ versus other investment destinations and the returns available here are weighted against competing returns and adjusted for specific market influences including gearing and hedging costs. Right now, all of the NZ ingredients are delivering up a fairly compelling story which local and foreign buyers like.”
With the considerable bid coverage and investor demand increasing from a range of purchaser types, sourcing quality investment opportunities is vital.
CBRE has a range of investment properties available right now with two current campaigns being 48 Greys Avenue and 345 Queen Street, both within the Auckland CBD and according to McGregor there has been strong enquiry levels for both assets. These are two very different opportunities, with one attracting ‘value add’ capital and the other ‘long lease’ capital, with minimal crossover on the enquiry lists.
Understanding what motivates the purchaser, as well as the vendor is paramount to ensuring a successful transaction.
48 Greys Avenue is a perfect example of an asset with an opportunity to inject capital in order to add value, says McGregor. “The property offers a high land value component with significant redevelopment potential. “Its flexible zoning permits a variety of uses including offices, accommodation, education, entertainment, hotels and retail. It is ideally located for redevelopment into hotel, apartments or student accommodation or alternatively upgrade for modern office use.”
The triple net lease, 20-year WALE on 345 Queen Street demonstrates a long lease opportunity with structured rental increases. Investment in an asset with such structural certainty will enable investors to increase their portfolios WALE, while also diversifying occupier exposure into the education sector. The education sector in some ways has very similar characteristics to government tenants with these assets being highly sought after. The stability presented through long lease property can ensure an investor's position as the economic cycle slows.
Carr adds that another area that is catching the eye is the emerging Build-to-Rent sector. This is backed up by Tamba Carleton, CBRE’s Senior Research Analyst, who last week released CBRE’s Build-to-Rent: Who? What? Where? research report, which examines the shortcomings of the region’s current market, highlights who the early adopters of Build-to-Rent product are and where projects may be built across the Pacific region.
“Long a commercial development opportunity in the USA, we’re also seeing it in the UK and Australia, and the first multi-unit developments specifically intended to provide long-term rental housing are now emerging in New Zealand. The small existing stock of two developments offering 96 units at Uku Apartments in Hobsonville Point, and NZ Defence Force Housing at Whenuapai, represents the front end of a growth pipeline of 543 units in 12 developments, and significant future potential. Given the factors underpinning occupier demand and what from some aspects is a compelling investment rationale, we do expect BTR to become a growth sector in New Zealand."
Investors seeking diversification and risk-adjusted performance are attracted to the sector, and from a cash flow diversification perspective Build-to-Rent has advantages over other commercial property types. Carleton adds that Build-to-Rent is becoming increasingly attractive relative to other investment classes as commercial property and government bond yields remain consistently lower for longer. “Because Build-to-Rent is well established overseas, individuals and investors in New Zealand are waking up to how it should be priced, and its risks and opportunities.”
Carr says that these two increasingly attractive asset classes show that it could be time for investors to look at reallocating capital. “With the compression of our yields and the evolution of the cycle, it is a good moment now to think about investing in the right assets in the right locations.”
Ensuring that property portfolios are well balanced between location, sector, yield and risk ensure that investors can position themselves comfortably to face any headwinds in the future. The current levels of investor demand should enable investors to find a range of potential purchasers should divestment be required.
“We know there’s unmet demand in the market for assets with value-add attributes; resulting in strong pricing for the vendor. Finding or creating opportunities for investment which can provide diversification and income stability is key in this stage of the cycle. We anticipate these alternative sectors will continue to attract plenty of interest as we move forward.”
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CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue). The company has more than 90,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 480 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.