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>Real Estate Reflections<br>No Reprieve from Interest Rate Headwinds</h2>
<p></p>
<div id="m_-3425565903324753936iubdj-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2">
<p>Bond yields have continued to dictate listed property share performance. Long bond yields rose +40bp in April and are up +200bp over the last 12 months presenting a headwind to property sector valuations. Property sector dividend yield spreads to 10 year interest rates have compressed. The tightest spreads are concentrated in those with industrial focussed portfolios while the rest of the sector is trading closer to five-year average spreads. With six listed property vehicles (LPVs) reporting in May we expect focus to partly switch back to the fundamentals of tenant demand, rent growth, and asset valuations. We forecast DPS growth of +2% on average in FY23E which is slightly above the +1% per annum the sector has delivered over the last 10 years. However, this is only likely to be a temporary distraction from interest rates which we expect to continue to weigh on the sector valuations near-term.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/273/185/original/image_46852488531652230078251.png?1652230080" class="editor-image img-responsive" data-smartkarma-image-id="273185"></figure>
</div>
<div>
<h3>Share prices&nbsp;reacting to higher interest rates</h3>
</div>
<div>
<p>Interest rates took another step up in April. The 10 year NZ Government bond yields were +40bp in the month on top of the +50bp&nbsp; in March and are at their highest levels since early&nbsp;2015. After a surprisingly strong March, LPV share prices finally reacted to higher interest rates and were down -3.5%, with only Asset Plus (APL)&nbsp;showing a positive return as it divested a problematic asset.&nbsp;</p>
</div>
<div>
<h3>Interest rate headwinds set to continue</h3>
</div>
<div>
<p>LPV sector yield spreads have tightened and were 1.7% as at the end of April. Share prices have been relatively slow to react with Goodman Trust (GMT) and Property for Industry (PFI) gross dividend yields now broadly in line with long bonds. If share prices were to reset to historical five year average spreads the downside risk is greatest for industrial landlords.&nbsp;LPV's&nbsp;own debt also now provides an attractive risk adjusted alternative with GMT issuing five-year bonds for 4.74% and Precinct Properties issuing six-year bonds for 5.25%.&nbsp;</p>
</div>
<div>
<h3>May Reporting Season</h3>
</div>
<div>
<p>Six&nbsp;LPVs&nbsp;will report&nbsp;results this May. With COVID-19 impacting both FY22 results, the prior period comparisons of operating results will be of little use. We will focus on (1) underlying rent growth metrics such as market rent reviews and releasing spreads, (2) development progress and returns on cost, and (3) interest rate hedging cover and duration. Furthermore, while we expect flat asset valuations to be reported with FY22 results, management comments on forward cap rate expectations will be of interest. We calculate current discounts to last reported&nbsp;NTA&nbsp;are implying +50–120bp of cap rate expansion.</p>
</div>

Real Estate Reflections No Reprieve from Interest Rate Headwinds


Bond yields have continued to dictate listed property share performance. Long bond yields rose +40bp in April and are up +200bp over the last 12 months presenting a headwind to property sector valuations. Property sector dividend yield spreads to 10 year interest rates have compressed. The tightest spreads are concentrated in those with industrial focussed portfolios while the rest of the sector is trading closer to five-year average spreads. With six listed property vehicles (LPVs) reporting in May we expect focus to partly switch back to the fundamentals of tenant demand, rent growth, and asset valuations. We forecast DPS growth of +2% on average in FY23E which is slightly above the +1% per annum the sector has delivered over the last 10 years. However, this is only likely to be a temporary distraction from interest rates which we expect to continue to weigh on the sector valuations near-term.&nbsp;



Share prices&nbsp;reacting to higher interest rates


Interest rates took another step up in April. The 10 year NZ Government bond yields were +40bp in the month on top of the +50bp&nbsp; in March and are at their highest levels since early&nbsp;2015. After a surprisingly strong March, LPV share prices finally reacted to higher interest rates and were down -3.5%, with only Asset Plus (APL)&nbsp;showing a positive return as it divested a problematic asset.&nbsp;


Interest rate headwinds set to continue


LPV sector yield spreads have tightened and were 1.7% as at the end of April. Share prices have been relatively slow to react with Goodman Trust (GMT) and Property for Industry (PFI) gross dividend yields now broadly in line with long bonds. If share prices were to reset to historical five year average spreads the downside risk is greatest for industrial landlords.&nbsp;LPV's&nbsp;own debt also now provides an attractive risk adjusted alternative with GMT issuing five-year bonds for 4.74% and Precinct Properties issuing six-year bonds for 5.25%.&nbsp;


May Reporting Season


Six&nbsp;LPVs&nbsp;will report&nbsp;results this May. With COVID-19 impacting both FY22 results, the prior period comparisons of operating results will be of little use. We will focus on (1) underlying rent growth metrics such as market rent reviews and releasing spreads, (2) development progress and returns on cost, and (3) interest rate hedging cover and duration. Furthermore, while we expect flat asset valuations to be reported with FY22 results, management comments on forward cap rate expectations will be of interest. We calculate current discounts to last reported&nbsp;NTA&nbsp;are implying +50–120bp of cap rate expansion.


Real Estate Reflections: No Reprieve from Interest Rate Headwinds