Oct 12, 2018

Unlisted Commercial Property Stands Test of Time

Understanding what the future holds for the local and global economy is akin to looking into a crystal ball. Earlier in the year there was much speculation about whether the world was heading into a GFC2 (Global Financial Crisis). It hasn’t. One person who got this right was renowned economist, Cameron Bagrie, of Bagrie Economics.

The former ANZ chief economist predicted ongoing volatility and share market uncertainty, but no massive correction. So what does he think will happen to New Zealand’s economy over the next 12 to 18 months? Grumpflation.

In Bagrie’s language that’s the combination of grumpy growth and rising costs.

“Growth across the New Zealand economy has moderated and there is growing wariness that a downturn is around the corner,” says Bagrie.

“But I don’t like the term downturn. There are risks, notably offshore and I’m getting increasingly worried about places like China, but the New Zealand economy is in reasonable shape when we eye the bigger picture. Where the world goes we will follow though, and there are a lot of risks.

“The New Zealand economy does not have severe late-cycle excesses that can warn of a pending correction. The economy does have points of vulnerability, such as extended Auckland property prices, but not an array of warning signs,” he says.

“It’s no secret NZ has a love affair with property, particularly residential. However, increasing compliance, the extension of the brightline test and surging capital values are making residential investment less attractive.

CEO of established unlisted funds and property manager, Property Managers Group (PMG), Scott McKenzie, says the Group is seeing much more enquiry and investment in its direct commercial property funds from traditional residential property investors.

”We recently received two AA recommended ratings from FundSource for two of our retail funds – Pacific Property and PMG Direct Office Fund, one of the first unlisted funds and property manager in NZ to receive two,” McKenzie says.

“This recognition, coupled with the solidly performing commercial property sector are two of the factors driving interest in our funds,” he says.

The commercial property sector is enjoying a period of prosperity on the back of a strong New Zealand economy. What’s more, commercial property yields continued to outpace interest rates, offering attractive and easily accessible opportunities for investors¹.

Considering the above and the graph below, now may be a good time to dip their toes into the commercial market.

Compared to other asset classes including residential, bank bonds and listed property vehicles (LPVs), unlisted commercial property is currently delivering much better yields and providing exposure to diversified and passive property investment opportunities – models which are not easily replicable by individual investors.

Research(2) shows if you had invested $100,000 25 years ago in directly-held commercial property, the value of your investment now would be 7.75 times that at $775,000 (2018). It also states that following the GFC it took direct commercial real estate only three years to fully recover its loss of value (approx. 40%) versus equities which lost the equivalent value, which took six years.

“Investors gravitate back to tangible assets with easily identifiable revenue streams when markets are volatile and uncertain, just like we are seeing now,” says McKenzie.

“PMG’s business model ensures our debt to equity ratio is managed as conservatively as possible.

We offer investment funds diversified by sector and geography with multiple buildings and multiple tenants which ensures investor risk is managed, investor capital is preserved with regular and more reliable cash flow.”

“With a diverse choice of unlisted commercial investment funds, mortgage brokers and financial advisors can offer their clients alternative options and benefits.

“While we can’t predict the economic future, PMG’s 26-year proven track record of providing sustainable returns through a variety of challenging economic fluctuations, and our business model, puts us in good stead to weather any pending turbulence,” he says.

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1 https://www.realestate.co.nz/blog/news/commercial-property-good-investment-compared-residential-new-zealand
2 https://www.pmgfunds.co.nz/unlisted-commercial-property-stands-test-of-time
Content of the article is the opinion of Scott McKenzie and Cameron Bagrie and is not intended as personalised financial advice. You should seek independent financial advice from an authorised financial advisor before making any investment decisions.

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