New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kiwi Property Group (KPG) Building to rent</h2>
KPG has announced it will begin investing in build to rent (BTR) residential assets, which see’s landlords develop properties as long term rentals. KPG has cited declining housing affordability and the subsequent increase in number of renters in Auckland as key catalysts. While still in its infancy in NZ, BTR is a significant asset class offshore and accounted for 36% of real estate investment in the US and 26% in Europe &nbsp;in 2020. Based on the growth trajectory of the UK BTR market, KPG forecasts that there could be c.18k BTR homes built in Auckland by 2030.
KPG’s first BTR development&nbsp;will&nbsp;be at Sylvia Park with construction expected to commence in late 2021 and completed early 2024. The construction cost is expected to be NZ$221m for 295 apartments across three buildings generating an net yield on cost of c.4.5% and an IRR of &gt;8.0%. The development will be debt funded and pending the outcome of the Plaza and Northlands sale processes. KPG then plans to build BTR into it’s LynnMall mixed-use tower with 245 apartments planned, as well as ground level retail, three floors of office and parking spaces. No cost or return metrics were provided for the LynnMall project. Longer-term, KPG has outlined the potential for a total of c.1,200 BTR apartments at Sylvia Park and 600 at LynnMall.
Our View
It is good to see progress on KPG’s strategic initiatives given they have been well signalled. We believe further investment in KPG’s best assets is the right strategy to improve the long-term outlook of the portfolio with the time taken to complete the divestment of The Plaza (announced c.12 months ago) and Northlands (announced in May) highlighting the patchy demand for direct investment in large regional retail assets.
Based on our calculations the NZ$221m cost of Sylvia Park BTR fits within KPG gearing targets. We estimate committed gearing (including the new NZ$63m Sylvia Park office building) falls to 25.3% post the sale The Plaza and Northlands. We estimate that KPG has capacity for the NZ$70m Centre Place North office tower, NZ$50m of Drury earthworks, a third NZ$100m Sylvia Park office tower, as well as another c.NZ$280m of developments before it reaches the top end of its target gearing range (25%–35%) based on current asset values. Furthermore, the divestment of The Plaza and Northlands is already factored into our AFFO and DPS forecasts (which assume divestment of both assets in FY22) but the upside of deploying balance sheet capacity into BTR is not. We are NEUTRAL rated on KPG.
Conference call
KPG will hold a conference call at 10:30am NZT. The webcast can be viewed&nbsp;<a href="https://edge.media-server.com/mmc/p/mzhwcv2y" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://edge.media-server.com/mmc/p/mzhwcv2y&amp;source=gmail&amp;ust=1632271760199000&amp;usg=AFQjCNEzBt1aerG8ztAnNI-IbuSKDg0TtQ" rel="noopener">HERE</a>, or alternatively you can join the conference call by pre-registering&nbsp;<a href="https://apac.directeventreg.com/der/validateConferenceId.action" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://apac.directeventreg.com/der/validateConferenceId.action&amp;source=gmail&amp;ust=1632271760199000&amp;usg=AFQjCNF12j1cNKFC3_cPWoCRDd1eJ9FNZw" rel="noopener">HERE</a>.

Kiwi Property Group (KPG) Building to rent
KPG has announced it will begin investing in build to rent (BTR) residential assets, which see’s landlords develop properties as long term rentals. KPG has cited declining housing affordability and the subsequent increase in number of renters in Auckland as key catalysts. While still in its infancy in NZ, BTR is a significant asset class offshore and accounted for 36% of real estate investment in the US and 26% in Europe &nbsp;in 2020. Based on the growth trajectory of the UK BTR market, KPG forecasts that there could be c.18k BTR homes built in Auckland by 2030.
KPG’s first BTR development&nbsp;will&nbsp;be at Sylvia Park with construction expected to commence in late 2021 and completed early 2024. The construction cost is expected to be NZ$221m for 295 apartments across three buildings generating an net yield on cost of c.4.5% and an IRR of &gt;8.0%. The development will be debt funded and pending the outcome of the Plaza and Northlands sale processes. KPG then plans to build BTR into it’s LynnMall mixed-use tower with 245 apartments planned, as well as ground level retail, three floors of office and parking spaces. No cost or return metrics were provided for the LynnMall project. Longer-term, KPG has outlined the potential for a total of c.1,200 BTR apartments at Sylvia Park and 600 at LynnMall.
Our View
It is good to see progress on KPG’s strategic initiatives given they have been well signalled. We believe further investment in KPG’s best assets is the right strategy to improve the long-term outlook of the portfolio with the time taken to complete the divestment of The Plaza (announced c.12 months ago) and Northlands (announced in May) highlighting the patchy demand for direct investment in large regional retail assets.
Based on our calculations the NZ$221m cost of Sylvia Park BTR fits within KPG gearing targets. We estimate committed gearing (including the new NZ$63m Sylvia Park office building) falls to 25.3% post the sale The Plaza and Northlands. We estimate that KPG has capacity for the NZ$70m Centre Place North office tower, NZ$50m of Drury earthworks, a third NZ$100m Sylvia Park office tower, as well as another c.NZ$280m of developments before it reaches the top end of its target gearing range (25%–35%) based on current asset values. Furthermore, the divestment of The Plaza and Northlands is already factored into our AFFO and DPS forecasts (which assume divestment of both assets in FY22) but the upside of deploying balance sheet capacity into BTR is not. We are NEUTRAL rated on KPG.
Conference call
KPG will hold a conference call at 10:30am NZT. The webcast can be viewed&nbsp;HERE, or alternatively you can join the conference call by pre-registering&nbsp;HERE.

Kiwi Property Group (KPG): Building to Rent