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Property Returns “Cresting the wave”

Press Release 18 March 2008

Property Returns “Cresting the wave”

Returns on commercial property in New Zealand remain at high levels despite a slight softening from the record high returns of last year.

Property Council of New Zealand CEO Connal Townsend said the latest December quarter figures from the PCNZ/IPD Investment Performance Index survey indicate a total return for the Real Estate sector of 22.4%, a softening from the June 2007 number of 24.1%.

“But that remains a great and not unexpected result for the commercial property sector”, commented Mr Townsend. “The stability and low volatility of the sector do come into their own at times in the economic cycles and this is one of those occasions. In the office and industrial sectors in particular, tenant demand for well-located property to lease exceeds demand, suggesting that rents should continue to grow in the short term.”

Alan McMahon, Property Council research chair said “The re-evaluation of risk means we are seeing prudent pricing of prime and secondary property. In general, good quality, or low risk, property is holding its value while secondary, riskier assets are not. Rising values by virtue of yield compression are at an end for the time being.”

There is a big difference between investing in commercial and residential property’, said McMahon Typically residential investors require good levels of capital gain to get strong returns, whereas year in, year out, the Property Council Index shows investors in all non-residential categories achieve 8% to 10% rental return annually, often with robust capital gains on top.”

“The best of the major markets was the Wellington Office Sector which recorded 28.4%, a shade under its record high in June 2007 of 29.0%. Strong rental growth and the yield firming experienced during 2007 have been the drivers in this market. Demand is strong,, and vacancies are low. These numbers reflect the dynamics of that market” said Mr Townsend.

“That’s based on trends we are already hearing about anecdotally, with more investment going into the major property trusts while investment on the fringes cools. That means it is likely that these trends will smooth the curve on investment in the commercial property sector so that it doesn’t experience the same swings from high to low as the residential sector.”

“The increased cost of borrowing will cause investors to seek higher rental returns, to compensate for their increased debt costs”, said McMahon. “That will manifest itself in lower prices for property where the market doesn’t see a rental upside “ IPD Director John Garimort remarked: “While the property sector has been generating strong returns for investors over the past five years, the market is not immune to the effects of recent economic news.

“The industrial sector has generated results significantly lower than the other sectors for a couple of years now. It is generally a less volatile sector given shorter construction cycles and planning policy that looks to ensure that demand for industrial land is satisfied. “

The detailed results show that for the 12 months to December 2007, the various investment sectors generated returns as follows;

Income Return Capital Growth Total Return New Zealand Composite 7.7 13.7 22.4 New Zealand Retail 7.4 15.8 24.2 New Zealand CBD Office 7.5 17.5 26.2 New Zealand Industrial 8.4 6.6 15.5 The diagnostic tools that accompany the report indicate that while all assets are valued within the past 12 months, almost a quarter of the sample had valuations recorded for the December calculations. This adds to the structural integrity of the index as a barometer of investment returns for the sector.

The PCNZ IPD Index is New Zealand’s leading benchmark of commercial property investment returns. The figures are based on analysis of 281 properties, valued in excess of $6.9 billion and are a part of the wider market data that the PCNZ and IPD have on the real estate sector.

About Property Council New Zealand (PCNZ)

The Property Council is New Zealand’s property voice, a professional association that represents members who have a vested interest in commercial property. PCNZ actively involves itself with central, local and other government associated bodies, promoting the views, goals and ideas of our members. Membership is broad, including owners, managers, builders and investors of commercial property in New Zealand. Collectively, members own and manage a $24 billion commercial property investment in New Zealand. Members are committed to ensuring the continued growth of New Zealand's economy to help create a vibrant commercial property market.

About IPD

IPD commenced its New Zealand service in March 2006, operating out of its office in Melbourne. IPD have entered into an agreement with the Property Council New Zealand assuming responsibility for the generation of indices for the New Zealand market.

In addition to indices, IPD provides benchmarking services for a variety of direct investment vehicles (Wholesale funds, Superannuation and Pension funds, Property Syndicates), and indirect vehicles (Listed Property Trusts).

These services are similar to those provided in other countries with the only material differences being the extent to which data is provided, and the initial offering of IPD’s new vehicle level analytics. The IPD New Zealand Databank covers over 330 investments with a value of around NZ$7.5 billion.


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