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>Solid Results, Shame About the Rates</h2>
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<p>Listed property vehicles (LPVs) who reported in May generally delivered a solid set of results despite the impact of the Delta lockdown. Robust occupier demand and inflation lifted occupancy and rents across the board. Industrial remains the strongest sub sector operationally but CBD office and retail also recorded solid outcomes. However, FY23 consensus dividend forecasts were lowered, likely reflecting the impact of higher debt costs on distribution guidance. Debt hedging&nbsp; remains at high levels across the sector and gearing is generally towards the lower end of target ranges, which we believe is prudent given general management caution on asset valuations. Despite the solid operational outcomes we expect LPV share prices to remain driven by interest rate volatility in the near term. Our preferred picks in the sector are; Stride (SPG) for its transition to an asset manager and attractive valuation metrics, PCT for its high quality portfolio and low gearing, and Investore (IPL) due to its defensive supermarket based rent and large discount to NTA.</p>
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<h3>Robust reporting season</h3>
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<p>Overall, it was a solid reporting season on our scorecard. Results generally beat expectations, we largely upgraded our estimates, and share price reaction was generally flat to positive. Operationally, like-for-like rent growth was +2% to +5%, re-leasing spreads were +4 to +11%, and occupancy remained robust. A number of management teams pointed to under-renting within their portfolios but were cautious on the outlook for asset values, portfolio activity, and development commitments.</p>
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<h3>Interest rate headwinds remain</h3>
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<p>The LPV sector underperformed the broader market in May, down -6.5% compared to the NZX50 down -4.8%. Higher interest rates remains the&nbsp;key headwind to sector valuations. Yield spreads remain tighter&nbsp;than their historical average, but the sector remains bifurcated, with industrial yields particularly low. Industrial equity yields remain at or below the yield on their own bonds. We expect high interest rates to continue to weigh on sector performance over the coming months. The 10-year NZ Government bond yield is up +25bp thus far in June.</p>
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<h3>Property has been the worst hit of the yield sectors</h3>
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<p>As highlighted in Figure 23, LPV yields have expanded more than the&nbsp;electricity sector and other bond proxies such as&nbsp;Chorus&nbsp;and Vector. This is largely due to greater share price falls in the property sector. Property is now at or close to its highest relative yields&nbsp;versus&nbsp;these&nbsp;other yield sectors.</p>
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Real Estate Reflections Solid Results, Shame About the Rates


Listed property vehicles (LPVs) who reported in May generally delivered a solid set of results despite the impact of the Delta lockdown. Robust occupier demand and inflation lifted occupancy and rents across the board. Industrial remains the strongest sub sector operationally but CBD office and retail also recorded solid outcomes. However, FY23 consensus dividend forecasts were lowered, likely reflecting the impact of higher debt costs on distribution guidance. Debt hedging&nbsp; remains at high levels across the sector and gearing is generally towards the lower end of target ranges, which we believe is prudent given general management caution on asset valuations. Despite the solid operational outcomes we expect LPV share prices to remain driven by interest rate volatility in the near term. Our preferred picks in the sector are; Stride (SPG) for its transition to an asset manager and attractive valuation metrics, PCT for its high quality portfolio and low gearing, and Investore (IPL) due to its defensive supermarket based rent and large discount to NTA.



Robust reporting season


Overall, it was a solid reporting season on our scorecard. Results generally beat expectations, we largely upgraded our estimates, and share price reaction was generally flat to positive. Operationally, like-for-like rent growth was +2% to +5%, re-leasing spreads were +4 to +11%, and occupancy remained robust. A number of management teams pointed to under-renting within their portfolios but were cautious on the outlook for asset values, portfolio activity, and development commitments.


Interest rate headwinds remain


The LPV sector underperformed the broader market in May, down -6.5% compared to the NZX50 down -4.8%. Higher interest rates remains the&nbsp;key headwind to sector valuations. Yield spreads remain tighter&nbsp;than their historical average, but the sector remains bifurcated, with industrial yields particularly low. Industrial equity yields remain at or below the yield on their own bonds. We expect high interest rates to continue to weigh on sector performance over the coming months. The 10-year NZ Government bond yield is up +25bp thus far in June.


Property has been the worst hit of the yield sectors


As highlighted in Figure 23, LPV yields have expanded more than the&nbsp;electricity sector and other bond proxies such as&nbsp;Chorus&nbsp;and Vector. This is largely due to greater share price falls in the property sector. Property is now at or close to its highest relative yields&nbsp;versus&nbsp;these&nbsp;other yield sectors.


Real Estate Reflections: Solid Results, Shame About the Rates

Stride Property

Real Estate Reflections: Solid Results, Shame About the Rates