Peter's Perspective
19th July 2013 by Peter Churchouse

What’s Happening in the Land of the Long White Cloud

The Polynesians called it Aotearoa – the land of the long white cloud. Dutch mapmakers called it Nieuw Zeeland. And more than 100 years later in 1769 Captain Cook and his colleagues anglicised its name to New Zealand.

When the snow melts in San Moritz, some of the “endless winter” crowd of ski junkies migrates to this part of the southern hemisphere to indulge their passions on the slopes of a different alpine range. My trip to New Zealand this week unfortunately was not a pilgrimage to the slopes. It was to assess the opportunities for investment in hard assets there. AHA Report readers may recall that I have been positive about some commercial property REITs in that market over the past 3 to 4 years. They tick the dividend yield box handsomely, and the “price appreciation potential” box. Their share prices have been on a steady upward trajectory.

This trip was a case of rolling up the sleeves, burning the shoe leather and getting the low down on investment prospects in the residential market there.

I liked what I saw.

New Zealand suffered during the US initiated global financial crisis, with real estate prices falling sharply and a slew of financial companies hitting the wall.

But the economy recovered reasonably well thanks to buoyant prices for agricultural commodities, most importantly milk products, and due to solid trade with large Asian economies.

Like many parts of the region, Mr. Bernanke’s easy money policies have helped grease the wheels, particularly in the housing market and particularly in the country’s largest city, Auckland. It feels and smells a bit like New York, London, San Francisco, Hong Kong and Singapore, but on a much smaller scale. Its population of 1.4 million is less than 20% of New York or London.

Auckland housing prices are definitely on the up. Average prices were up around 12% in the past 12 months (depending on whose data you care to look at). And there are good reasons for this.

More people have jobs, and they are being paid slightly more. Unemployment has come down from a high of 7.3% to 6.2%, and it is lower in Auckland than nationally.

Housing construction collapsed following the 2008 financial meltdown, so that there is very little now coming available as demand picks up.  Supply is currently tight. However, there is more production on the way as developers see the shortages in the market. (Recall our June AHA Report “Profiting From The Inevitable Demand and Supply Imbalances in Hard Assets)

Mortgage rates have never been lower. There is little to no motivation for the central bank to push rates up anytime soon. It is staring at prospects of a slower economy, and the lower interest rates right now may be helping the exporters through a weaker currency.

The Asian Factor

Auckland is a magnet for Asian migrants, students and families looking for a secure bolt hole out of volatile, politically uncertain regimes. A walk down Auckland’s main street, Queen Street, is just like “home” for us based in Asian cities.

New Zealand’s 4.4 million people live in a country that is one sixth bigger than Great Britain, but has only about 7% of its population. The country needs more people. Policy makers are getting to grips with the need to boost population to ensure growth and combat the dangers of an ageing, increasingly dependent population.

Auckland will be the first port of call for most newcomers. Planners are talking of the need to build higher not wider. All of this combines to tell me that this city is going to experience sustained population pressures over the coming years, and having a slice of good quality rental property in the inner city will produce good rental income and the likelihood of sustained capital appreciation over the coming property cycle.

A bit more than a year ago, China and New Zealand signed China’s first ever bilateral trade agreement.  This agreement was important for both sides – a politically important precedent for China, and an important opener for greater trade for tiny New Zealand. My experience in trade groups that I work with in Asia tells me that Chinese companies will take full advantage of improved access to products, services and businesses in New Zealand. And setting families up there, offices and operations will all feed the local property markets, including housing.

Currency shifts may be also be a motivator for Chinese investors. Chinese buyers are vacuuming up investments in the US in many sectors. And also to some extent in the UK. The Chinese Yuan has appreciated about 10% against the USD since 2010 and more like 21% against the GBP since 2009.  Against the commodity driven Australian and New Zealand dollars, the Yuan has been more stable. But as the gloss has come off the commodity markets, there has been roughly a 10% weakening of these currencies against the Yuan in the past 3 months. This makes assets cheaper in these markets for Yuan buyers.

The role of foreign buyers in the market right now should not be underestimated. They are a significant force, and most are Asians. A meeting with a long established lawyer friend this week said that his practice is dealing with 20 plus property transactions per week for Asian clients. He has taken on a small team of Chinese speakers to deal with this flow, and the deals are not just families buying a small apartment for own use or investment. New Zealand is simply tapping into the Asian money flows in a similar way as the US, UK and Australia is. Asians like the English common law system. They trust it, and that is easy to understand when one looks at the often unaccountable, corrupt regimes that many are forced to endure.

The majority of people checking out the bricks and mortar at “open homes” that I visited in the last week were Asian. That will become a familiar pattern to many major western cities if it is not already.

Having completed three trips in the past nine months to do my homework in this market, I am convinced that it is providing decent opportunities in a market that is recovering from the global financial crisis. Structural demand dynamics are up there on a par with some other major global cities, albeit on a smaller scale. Prices in prime areas are one third those of London, or less. Supply at the moment is tight. Population policy imperatives will prove of structural importance in the coming decade.

Prime rental properties in the residential market in Auckland can produce a yield of 6.5% – 7.5% net of property management costs and local authority municipal taxes.

And on top of that I can buy and sell freely, in an English common law jurisdiction, with freehold title, with modest tax costs. On that score, one of my long time business acquaintances and ertswhile investors with my fund who deals with very high net worth European families tells me that many of his clients find the New Zealand trust law and taxation system very agreeable for their purposes.

Right now I am buying residential property in Auckland

For those who do not have the ability to undertake direct property investment in such markets, there are listed alternatives with REITs and builders like;

 – Precinct Properties New Zealand (PCT:NZ), focused on investing in and leasing commercial office properties in Auckland & Wellington. Currently yields 5.23%

 – Kiwi Income Property Trust (KIP:NZ): Invests in, manages and develops diversified properties throughout New Zealand, including office, retail and industrial. Currently yields 6.77%.

 – Goodman Property Trust (GMT:NZ): Invests in, manages and develops office, industrial and retail properties in Auckland. Currently yields 6.50%.

 – Fletcher Building Limited (FBU:NZ): Manufactures and sells building industry products in New Zealand and Australia and involved in residential and commercial construction. Currently yields 4.80%.

Thanks for reading and have a great weekend,
Peter

P.S. If you would like more specific ways to invest, try a 50 day risk-free trial to The Churchouse Letter.

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