Chair, Summer Investment Committee
Imagine you had to leave the planet for 30 years and were out of contact all that time. Then imagine that you were only allowed to invest all your money in just one asset class and nothing else. What would you invest in?
It’s tricky – most of us would want to be well diversified if they could not touch their money for that period of time - but that is outside the rules of this little thought game.
For me, if I was ever in such a position, I would take a deep breath – but then I’d choose commercial property. However, I would not go out and buy just one building somewhere; instead, I would buy some of the listed Property that is available on the sharemarket.
There are ten property companies and trusts that are listed on the New Zealand sharemarket. In essence, they all own big commercial property portfolios giving investors quick and easy exposure to commercial property and the returns that this asset class provides. These returns are usually good – commercial property can offer high cash yields as well as capital growth.
There are difficulties for most of us if we think of buying commercial property directly. The best opportunities in commercial property cost large sums of money – amounts that virtually none of us can afford. If we try to buy a building, we will almost certainly have to buy a poorer quality building: something which may be a bit run down, in a poor location and with a short lease to a less than perfect tenant.
That’s the big problem with commercial property: the good properties are just so expensive.
However, the listed property vehicles offer a solution – they pool a lot of investors’ capital, they are able to buy top quality buildings which are leased to excellent tenants on long lease terms. Not only do the listed property vehicles own top grade property, they own multiple buildings and so are diversified across the commercial property sector.
A little sliver of something good is better than all of something not-so-good. I would rather own 0.000001% of a good property portfolio than 100% of my own rather ordinary building. Listed property lets you buy into and get exposure to commercial property for only a little money.
In addition to the ten property companies and trusts that are listed on the New Zealand sharemarket, there are dozens in Australia and many more in other countries around the world. They can offer exposure to all the different types of commercial property: office buildings, industrial property, medical buildings, retail etc.
Here in New Zealand you can buy and sell property held by companies and trusts that are listed on the NZX through a sharebroker at any time. This is very easy and relatively cheap and it generally makes these investments more liquid (which is not the case if you buy your own building).
However, this ability to buy and sell on a publicly traded market like the NZX does mean that the value of the shares of the property companies and trusts will fluctuate somewhat. Unlike buying and owning your own building, shares are traded on market and the prices paid are transparent. Although the value of the underlying buildings is quite stable, the shares are less so.
At the moment, the average before tax dividend paid by the listed property sector in New Zealand is 7.1%. When bank deposit rates are at about 3.5% that represents good income to investors.
As well as these dividends, you may receive some capital gain, i.e. the share price could rise. Over long periods of time, the values of the buildings that they own should grow and the value of your property shares should increase with them. Moreover, as rents rise, dividends should also increase. However, property companies and trusts usually have some debt and so are vulnerable to rising interest rates.
Good quality property usually performs well in good times and can be reasonably defensive investments in bad times. During good economic times, the rents rise (leading to higher dividends) and capital values may also rise (giving higher share prices). During poor economic times rents may fall a little as too will capital values. However, most listed property vehicles have good quality tenants who are mostly able to continue to pay their rent even in tough times. They are bound by long-term leases – although dividends may reduce, they are unlikely to stop completely.
Like all investments, there are risks that need to be taken into consideration. For Listed Property these include investment return and market cycles and as noted above the potential for the associated fall in rents and capital value. In a severe down cycle, tenants can be hard to find even for the best located properties. Furthermore remember that these investments are listed on sharemarkets and sharemarkets are volatile. As an active manager, we assess both the risks and opportunities.
The Summer Investment Selection has an allocation of 8% to listed property. This allocation is managed by Malcolm Davie and, at the moment, the three biggest holdings are Precinct Property (office buildings), Kiwi Property Group (diversified) and Goodman Property Trust (industrial property, showrooms and office parks). The fund that is managed by Malcolm also owns a small amount of Australian listed property. Members of the Summer KiwiSaver scheme that select the My Plan option can asset allocate to listed property.
If you are like many Kiwis and love property, listed property can offer the best of all worlds: exposure to high quality commercial property with its yields, growing income and potential capital gains. Moreover, it is easy to buy and sell in small parcels of shares and you do not have to spend your time managing tenants and other issues. Of course property is always vulnerable to interest rate rises and the shares in listed property will be volatile but, in my view, it's worth every investor considering if they should have at least some listed property in their portfolio.
You might like to discuss the views in this article with your Authorised Financial Adviser. Please call your Adviser directly or toll free on 0800 11 55 66.
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