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>Swimming&nbsp;Against&nbsp;the Tide</h2>
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<p>Listed property vehicles (LPVs ) had a solid month despite a +50bp rise in government bonds. Sector valuation metrics remain at elevated levels, however, there is a wide dispersion within the sector. Those LPVs with industrial and healthcare assets are at the tightest yields while retail remains out of favour. Rising bond yields are starting to pressure direct property valuations, with industry feedback suggesting prime yields could rise +50bp and secondary +100bp. With the sector now trading at a 12% discount to NTA, our analysis suggests this level of cap rate expansion is already priced in. Our preferred picks in the sector are; Stride (SPG) for its transition to an asset manager and attractive valuation metrics, Precinct Properties (PCT) for its high quality portfolio and development pipeline, and Investore (IPL) due to its large discount to NTA.</p>
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<h3>Surprisingly strong month given bond yields rose +50bp</h3>
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<p>Listed real estate had a solid month defining a +50bp move in bond yields. The S&amp;P/NZX All Real Estate Gross index was +1.2% in March and slightly outperformed the broader market which was up +1.1%. Vital Healthcare (VHP) was the strongest performer of the large cap LPVs and received a boost from entry into the EPRA NAREIT index. Goodman (GMT) lagged despite further portfolio revaluation gains of NZ$150m being announced.</p>
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<h3>High yields a continuing headwind for the sector</h3>
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<p>While sector share prices are down 7% year to date, the sector continues to trades on elevated multiples with a median PE of 21.7x. Based on this historical relationship to bond yields we would expect a sector median PE closer to 18x for a bond rate of c.3.3%. The sector is also trading on a +190bp dividend yield spread to the 10-year government bond yield which is around half its five year average of +400bp. The flattened yield curve (with&nbsp;3–10 year rates all at c.3.5%) suggests the outlook for economic growth has moderated.</p>
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<h3>Market pricing implies 10–100bp of cap rate expansion&nbsp;</h3>
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<p>A combination of strong asset revaluations and lower share prices has seen the LPV sector quickly swing from trading at a premium to NTA, to a discount. The listed market is a relatively good predictor of cap rate movements. Anecdotes&nbsp;from&nbsp;commercial real&nbsp;estate agents suggest yields on prime assets could expand +50bp and secondary +100bp. Our calculation of implied cap rates suggests that LPV share prices&nbsp;are currently pricing in 10–100bp of expansion.</p>
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Real Estate Reflections Swimming&nbsp;Against&nbsp;the Tide


Listed property vehicles (LPVs ) had a solid month despite a +50bp rise in government bonds. Sector valuation metrics remain at elevated levels, however, there is a wide dispersion within the sector. Those LPVs with industrial and healthcare assets are at the tightest yields while retail remains out of favour. Rising bond yields are starting to pressure direct property valuations, with industry feedback suggesting prime yields could rise +50bp and secondary +100bp. With the sector now trading at a 12% discount to NTA, our analysis suggests this level of cap rate expansion is already priced in. Our preferred picks in the sector are; Stride (SPG) for its transition to an asset manager and attractive valuation metrics, Precinct Properties (PCT) for its high quality portfolio and development pipeline, and Investore (IPL) due to its large discount to NTA.



Surprisingly strong month given bond yields rose +50bp


Listed real estate had a solid month defining a +50bp move in bond yields. The S&amp;P/NZX All Real Estate Gross index was +1.2% in March and slightly outperformed the broader market which was up +1.1%. Vital Healthcare (VHP) was the strongest performer of the large cap LPVs and received a boost from entry into the EPRA NAREIT index. Goodman (GMT) lagged despite further portfolio revaluation gains of NZ$150m being announced.


High yields a continuing headwind for the sector


While sector share prices are down 7% year to date, the sector continues to trades on elevated multiples with a median PE of 21.7x. Based on this historical relationship to bond yields we would expect a sector median PE closer to 18x for a bond rate of c.3.3%. The sector is also trading on a +190bp dividend yield spread to the 10-year government bond yield which is around half its five year average of +400bp. The flattened yield curve (with&nbsp;3–10 year rates all at c.3.5%) suggests the outlook for economic growth has moderated.


Market pricing implies 10–100bp of cap rate expansion&nbsp;


A combination of strong asset revaluations and lower share prices has seen the LPV sector quickly swing from trading at a premium to NTA, to a discount. The listed market is a relatively good predictor of cap rate movements. Anecdotes&nbsp;from&nbsp;commercial real&nbsp;estate agents suggest yields on prime assets could expand +50bp and secondary +100bp. Our calculation of implied cap rates suggests that LPV share prices&nbsp;are currently pricing in 10–100bp of expansion.


Real Estate Reflections: Swimming Against the Tide

Stride Property

Real Estate Reflections: Swimming Against the Tide