Feb 5, 2021

2021 Local Outlook – From PMG's CEO Scott McKenzie

In 2020, commercial property in New Zealand proved remarkably resilient.

It was helped by the following:

• The many great businesses that have adapted and grown, supporting the consistent cash returns commercial property continues to deliver.

• Weight of investor capital looking for a home, together with the low interest rate environment (meaning alternative investments like commercial property are offering higher returns than cash in the bank currently).

• Growing demand for industrial warehousing for transport, logistics and manufacturing businesses.

• Investor wariness of an over-valued share market.

• A move from hands-on investments (like residential property with its increasing regulatory burden and compliance etc.) to passive investments (like commercial property funds) underpinned by productive NZ businesses, land and buildings.

• We’ve seen unprecedented yield compression1 across commercial property over 2020.

• Investors globally are betting that interest rates will remain low for some time to come. As a result, many capital asset classes* have performed strongly over the past 12 months, now with some of the highest price-to-earnings ratios on record for many companies across world share markets.

While this could be the case for some months to come, the proverbial global ‘drug’ (central bank monetary and government fiscal stimulus) will need to be withdrawn from the arm (markets) at some point. This will occur faster than markets are currently expecting, i.e. as soon as we see growing inflationary pressure.

While we don’t know when this will be, we expect it will occur in the short to medium term.

Once this occurs, capital asset values are likely to see some of the air let out of the tyres as investors begin to reset their expectations of returns relative to risk.

To date, New Zealand’s businesses have shown resilience in the face of the pandemic. While this is encouraging, there are challenges ahead for NZ Inc and world economies.

While we are confident in the country’s ability to continue to weather the storm, we are an export nation, reliant on global supply chains. The ongoing disruption will likely impact NZ’s economy in the coming year.

PMG’s ongoing strategy in 2021 is then to continue increasing the robustness and resilience of our funds. In 2014, PMG transitioned from a single-asset property syndication model to a fund management structure (multiple properties, in multiple locations, with multiple tenants). This strategy has proven to be the right one.

While we saw businesses forced to work from home last year, and some increased their flexible working policy, we don’t expect to see a wholesale shift in the occupier demand for office spaces, as we have mentioned in previous articles.

PMG’s focus is on becoming the landlord of choice, and we continue to see growth opportunities across all sectors of the commercial property market, including the office sector. By investing for the long term and not attempting to pick the top or bottom of economic cycles, PMG firmly believes the commercial property sector will continue to deliver regular cash returns and long-term growth in value.

This article is from the latest issue of PMG's newsletter, PropertyLine. Read the full newsletter here.


Content of this article is the opinion of Scott McKenzie and is not intended as personalised financial advice. You should seek independent financial advice from
an authorised financial advisor before making any investment decisions.

* Weight of capital, low interest rates, commercial property yields providing strong returns relative to term deposits and bonds, occupancy levels across industrial and office sectors faring well following the COVID-19 lockdowns.

** Including commercial property, equities, residential property, artwork and gold.

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