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

Precinct Properties New Zealand / Equity Bottom-Up

Real Estate Reflections Internalisations — Have They Delivered?


The listed property vehicles (LPVs) were flat and underperformed the broader S&amp;P/NZX 50 in March, with higher bond yields continuing to weigh on investor sentiment. Precinct's (PCT) internalisation of its management contract was the most notable event in the sector this month and in this report we review the operating cost performance of other internalised LPVs. Our analysis suggests that shareholder value has been delivered, however, benefits vs. prior externally managed structures are slowly being eroded by cost creep. Also, the pricing of PCT's internalisation highlights the value of management contracts in the current market with Stride Property Group (the only LPV with an asset management platform of scale) being the key beneficiary in the sector.&nbsp;



LPVs&nbsp;flat but&nbsp;underperform&nbsp;the broader market


The NZ LPV sector was&nbsp;up +0.4% in March&nbsp;supported by distributions (the capital index was down -0.2%).&nbsp;The best performing&nbsp;LPVs&nbsp;were Kiwi Property Group (KPG) and Goodman Property Trust (GMT), both of which provided portfolio valuation&nbsp;updates ahead of their full year results.&nbsp;​​​​​​​LPVs&nbsp;underperformed the broader market with the NZX50G up +2.7% in March. We believe this&nbsp;underperformance&nbsp;partly reflects continued pressure from higher long bond yields.&nbsp;


Have recent internalisations delivered?


The most significant announcement from the sector this month was PCT's NZ$215m internalisation of its management contract, which is expected to result in an annual cash saving of NZ$14.6m. This continues a trend which has seen a number of LPVs buyout and cancel their external management agreements over the last decade, with half of the sector now internally managed. Our analysis of past internalisations suggest they have generated shareholder value above that of the initial payment but cost increases are slowly eroding the initial benefits over time. To date, lower debt costs have helped to offset this cost creep which has reduced operating leverage at the EBIT level.&nbsp;


Could we see more internalisations?


We do not believe the relatively high cost of PCT's internalisation will spur other LPVs to follow a similar path, with the managers of the remaining externally managed LPVs focussed on expanding their real estate asset management businesses. However, we do highlight that SPG is the owner of a number of management contracts which we estimate are potentially worth up to 27cps, based on the PCT transaction metrics, on top of its NZ$2.01 NTA.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Real Estate Reflections: Internalisations — Have They Delivered?