Fund watch

New Zealand property sector outlook

The domestic property sector continued to face headwinds as it struggled against the backdrop of elevated bond yields and a stubborn central bank that offered little relief for borrowers despite hard evidence the local economy was slowing.

Over the three-month period to 30 June 2024, the New Zealand listed property sector was down 8.6%, well behind its global peers. And over a one-year period, the sector was down 7.7%, compared to Australia’s equivalent, which rose by 24.9% over the same period.

Despite these gloomy figures, we are starting to see some bright spots on the horizon and are therefore cautiously optimistic on the outlook for the sector.

At its last meeting on 10 July, while the Reserve Bank of New Zealand (RBNZ) kept interest rates at elevated levels to try to curb inflation, it also indicated that it expected inflation to return to within its 1-3% target band later this year. Importantly, it also questioned whether its restrictive monetary policy might be hindering growth – a tentative signal that rate cuts could be coming sooner rather than later. This new development is providing a positive boost for the listed property sector and should support a re-rating of the sector if confirmed.

While the economy fell into a light recession late in 2023, in the first quarter of this year, growth moved back into positive territory (Gross Domestic Product was up 0.2%). Some other economic fundamentals are equally encouraging, including a still strong labour market and steady population growth, both of which should help to underpin demand for property.

Even in this continued challenging macro-economic environment, there are attractive investment opportunities within the New Zealand listed property sector. Valuations are only just starting to adjust to a more benign interest rate outlook. Selected sub-sectors, including industrial and healthcare, continue to see record low vacancy levels. Meanwhile, supply remains broadly disciplined. Transactional activity, a key driver of income for asset managers, should also rebound in the context of falling interest rates.

Of course, continued economic pressure will mean that demand overall will be affected, meaning that some tenants are bound to fail. However, the relatively high asset quality held by the listed property sector and the continued high asset replacement cost means the sector should be able to withstand these challenges. In the meantime, we continue to prioritise companies with quality properties, strong tenant covenants, sustainable income streams, and those located in prime areas that demonstrate better resilience against economic fluctuations.

Fund watch 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 the investment and administration manager. 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.