Fund watch

MFL Property Outlook – Q2 2022

It’s been a challenging period for equity markets, and the Australasian property sector has not been immune to the recent weakness, which has resulted in a decline.

The second quarter saw New Zealand and Australian listed property indexes decline by more than 10%, while other property-related sectors, such as the retirement village operators also saw significant declines.

Since the beginning of the year, stock markets around the world have sold off due to the sharp rise in interest rates due to central banks, including our own Reserve Bank of New Zealand (RBNZ), taking action to counter the surge in inflation. The rise in inflation has come about in part by COVID-related disruptions, and more recently, the impact of Russia’s invasion of Ukraine. For the property-related sector, it was the speed of interest rate rises that caused the greatest headwind.

Apart from higher borrowing costs, rising interest rates can also make cash flows offered by property a little less attractive compared to returns offered by bond yields and other fixed-income alternatives. Furthermore, when yields rise, the valuation of underlying assets can decline, which can also impede the share price.

In regards to the retirement sector, which is an integral part of the MFL Mutual Fund, it has faced headwinds from negative housing market sentiment, falling house sales volumes and declining prices – people generally need to sell their homes before moving into a retirement village.

Before we take a look ahead, it’s important to remember the importance to take a long-term approach to investing, and while we understand it can be unsettling to see the value of your investments decline, the MFL Mutual Fund’s long-term performance remains strong, delivering annual returns of 6.34% over five years, 6.61% over seven years and 9.41% over ten years (after the annual fund charge and before tax).

A look ahead

It’s often been said that things look the worst at the bottom, and while we are not saying the sell-off has ended, there are some indicators that many of these companies are attractive from a valuation basis at current levels. Despite the uncertain economic environment, the NZ listed property sector remains in good shape with low vacancy, long leases and contracted rents which are in large part linked to inflation. While higher interest rates will increase costs for property companies, most quality companies we track have strong balance sheets.

For example, Precinct Properties, one of the MFL Mutual Fund’s top holdings, said in its FY22 interim results that its portfolio occupancy rate was 98%, its portfolio has an average lease term of 7.7 years and its gearing is in the mid 30’s. Additionally, Kiwi Property Group, another long-standing holding of the fund, said its occupancy rate rose to 99.1% in its FY22 results with an average lease term of 4.9 years and gearing in the low 30’s.

And when we look at bond yields, we see some signs that they may be nearing a top as economic activity and sentiment among consumers and businesses are softening – a scenario where the RBNZ may not raise rates as high as the market is expecting. And, should we see a weaker period of economic growth, we believe the property sector is well-placed due to its defensive characteristics (contracted rents and steady cash flows).

Finally, when we take a step back, we are positive about the outlook for the fund given our focus on investing in the best quality listed property companies with strong management and a clear strategy for growing shareholder value – a philosophy that has benefited investors over the life of the fund, as seen by its long-term performance. By investing in these quality companies we can ensure that the portfolio can withstand periods of weaker economic growth and heightened volatility, such as the one we have seen to start the year.

This article has been prepared by ANZ New Zealand Investments Limited (‘ANZ Investments’) for information purposes only and it should not be treated as financial advice.

MFL Mutual Fund Limited is the issuer and manager of the MFL Mutual Fund. ANZ Investments is not an authorised deposit taking institution (ADI) under Australian law and investments in the scheme aren't deposits in or liabilities of ANZ Bank New Zealand Limited, Australia and New Zealand Banking Group Limited, or their subsidiaries (together 'ANZ Group'). ANZ Group doesn’t stand behind or guarantee ANZ Investments. Investments in the scheme are subject to investment risk, including possible delays in repayment, and loss of income and principal invested. ANZ Group won’t be liable to you for the capital value or performance of your investment.

Past performance does not indicate future performance, and performance can be negative as well as positive. This material is for information purposes only. We recommend seeking financial advice about your situation and goals before getting a financial product.

Investment and administration manager: ANZ New Zealand Investments Limited.