Positive capital growth for commercial property markets

First positive capital growth for New Zealand commercial property markets in three years!

Auckland, 9 May 2011

Overview

The PCNZ/IPD Commercial Property Index provides a measure of investment market performance across office, retail and industrial property sectors. The index is comprised of data from 19 participants, representing 24 funds/portfolios with 568 assets worth cNZ$10.3 billion representing c65% of the total New Zealand property market. The index details income return and capital growth on a quarterly basis. The index also provides pricing and market metrics such as capitalisation rates, discount rates and capital values.

PCNZ/IPD Property Index Performance 2012 Q1

Launched today, the index showed the first positive annual capital growth in three years of 0.2% for the broader New Zealand property market. Annual income return was 8.2% which resulted in a total return of 8.4% for the year to March 2012. The result represents a stronger return in comparison to the previous quarter of 7.6% but is still lower than the long-run total return of 10%.

Figure 1 shows rolling annual nominal total return split by income and capital return. The chart shows the upswing in commercial property and the first annual period of positive capital growth.

Figure 1

8.4% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Total return for direct commerical property rolling annual return on quarterly periods using PCNZ/IPD Index Capital return Income return Total return Long-run average Source: IPD Research. I


IPD PRESS RELEASE PCNZ/IPD New Zealand Property Index 9 May 2012


Property Sector Performance

The retail sector has lead the industrial and office sectors through the recovery phase with total return of 10.3%, 9.8% and 5.9% respectively. These comparative results are reported in Figure 2. Clearly, the retail sector has outperformed competing core property sectors, reflecting strength in retail spending and general consumption. The performance in the industrial sector has been stable, while the office sector experienced a decline in total returns, corresponding with weakness in employment and business conditions. The pace of recovery in all sectors remains slow and reflects weak space market fundamentals and macro economic activity.

Figure: 2

7.6% 8.4% 6.4% 5.9% 7.4% 10.3% 9.7% 9.8% -4% -2% 0% 2% 4% 6% 8% 10% 12% Dec-11 Mar-12 Dec-11 Mar-12 Dec-11 Mar-12 Dec-11 Mar-12 Performance across core property sectors capital return income return total return Source: IPD Research. average annual return Note: direct property returns based on PCNZ/IPD Index. Industrial Retail Office Composite

Trends in Pricing

With reference to pricing trends, average cap rates over the year to March 2012 stood at 8.3%. The retail sector experienced mild cap rate compression which is consistent with positive capital growth. Conversely, the office sector experienced cap rate decompression corresponding with capital growth declines. Cap rate movements are mild and are expected to remain generally steady. Interestingly, the cap rate spread to the ten year bond rate is now at c300bps, matching spread levels in the early 2000’s, before the rapid compression in cap rates. Cap rates across property sectors are detailed in Figure 3. I



IPD PRESS RELEASE PCNZ/IPD New Zealand Property Index 9 May 2012


Figure 3

6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 NZ average direct property cap rates period: Mar 2004 - Mar 2012 Industrial Office Retail Composite Source: IPD Research. GFC Lehman Bros collapse Deteriorating capital market and space market conditions Favourable capital market conditions

Property Vehicle Structures

For the first time, IPD has launched the New Zealand Property Vehicle Index. The index measures the asset level performance of properties held in various investment vehicles including; Unlisted Property Funds (UPFs), Listed Property Vehicles (LPVs) and ‘Other’ property vehicle structures. Results are detailed in figure 4.

Figure: 4

-10% -5% 0% 5% 10% 15% 20% 25% 30%Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Asset performance across vechicle structures annualised return on quarterly periods ending March 2012 UPF LPV Other Source: IPD Research. I


IPD PRESS RELEASE PCNZ/IPD New Zealand Property Index 9 May 2012


Figure 4 provides a summary of rolling annual total return results across investment vehicles to March 2012. Over the past 12 months, ‘other’ property structures, with a return of 13.2%, outperformed LPVs with a return of 8.2% and UPFs with a return of 7.2%.

Over the last three years, assets held in ‘other’ structures outperformed assets held by UPF’s and LPT’s due to a large exposure to retail property assets. Conversely, at the peak of the pre-GCF property cycle, assets held in UPFs and LPTs outperformed. These results show that no one investment vehicle dominates in delivering property investment returns. In addition, there appears to be a place for each property vehicle, depending on market cycles and sector/grade exposure.

Dr Anthony De Francesco, Managing Director of IPD in Australia and New Zealand, said, “The latest results suggest that the commercial property market is showing signs of improvement with capital values generally stabilising over the year.

Market conditions are likely to remain subdued due to generally weak demand underpinned by a soft labour market. Modest recovery in economic growth will mildly support retail sales. As such, growth in effective rents is likely to remain elusive for the main part of 2012.

Cap rates are expected to remain generally steady for the remainder of the year, due to on-going turbulence in capital markets. However, pricing will vary across property sectors: retail and industrial sectors expected to experience mild firming in cap rates while the office sector is set to experience a stabilisation in cap rates for prime stock.”

Property Council chief executive, Connal Townsend said, “The latest results are a positive reflection of the increasing confidence held by those in our industry during tough economic times. It is great to see that the commercial property market is now a financially worthwhile investment option once again.

The industrial market is continuing to perform positively, inching its way closer to the long running average of 10.0 per cent. I


IPD PRESS RELEASE PCNZ/IPD New Zealand Property Index 9 May 2012


Particularly pleasing is the news that retail property has performed well since March 2011, possibly reflecting the effects of the Rugby World Cup. Its total returns have almost doubled over the last year.

However, it seems the office property sector has been affected by shaky capital returns. I expect this to settle once employment figures pick up.

END.

Notes to editors:

IPD is a global information business, dedicated to the objective measurement of commercial real estate performance. As the world’s number one provider of real estate performance analysis for funds, investors, managers and occupiers, we offer a full range of services including research, reporting, benchmarking, conferences and indices. We operate in over 25 countries including most of Europe, the US, Canada, South Africa, South Korea, New Zealand and Japan. Our indices are the basis for the developing commercial property derivatives market, and the most authoritative measures of real estate returns worldwide. For further information visit www.ipd.com.

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