Why did the international community invest $880 million in New Zealand commercial property last year? Two unprecedented windows of opportunity are now open downunder.
New Zealand is the fastest growing economy in the dollar block, ahead of Australia, Canada and the US. It is a politically stable nation that consistently rates as one of the top countries in the world for business ethics. So when the commercial property market offers a gap averaging 3.% between borrowings and net returns on commercial property, astute international investors take notice.
A Gap in the Market
The yield gap is the difference between the yield on commercial property and the cost of borrowing. In Auckland, New Zealand's largest city, the current yield is 8.5%-10%. That is, investors can expect to receive a rental income of up to 10% of their purchase price. Incidentally, New Zealand property yields have outperformed other classes of assets in the UK, including equities.
Compare that Auckland yield with the cost of borrowing: 6.75%. Yield minus borrowing cost represents a very attractive gap for investors.
A gap that is projected to slowly close as New Zealand's interest rates are projected to gradually increase.
However, even as the first window of opportunity - the Yield Gap - becomes narrower, the second window of opportunity will come into play.
Super Power
In response to the western world's ageing population, the governments of Australia and New Zealand are about to implement a major superannuation (pension) strategy worth $306bn by 2010. Both governments have made it clear that a significant proportion of these funds will be invested in regional commercial property.
The injection of this superannuation capital will have two effects. It will certainly drive yields down, narrowing the current yield gap. At the same time, though, it will drive up the sale price of the property, generating unprecedented capital gain over forthcoming years. In addition, New Zealand law normally provides for ratchet clauses in lease agreements. That is, rents can go up on review, but cannot go down. Furthermore, because properties are normally held as freehold, net returns are not distorted by land rental rises. Add to that the fact that New Zealand has no specific capital gains tax regime, no stamp duty, no disclosure rules, no inheritance tax, double tax treaties with most countries and it is clear that the region's governments are presenting international investors with a very rewarding opportunity.
Investing now, through a vehicle such as the South Pacific Property Fund, locks investors into these high yields and benefits from capital growth. The interplay of these two windows of opportunities, plus the fact that they offer a clear exit from the market, is why Gaze Holdings and other international investors are endorsing New Zealand commercial property so strongly.
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