Share markets staged a rally at the beginning of last week, before falling back towards the end of the week. The US market finished the week up 1.51%, while the Australian market kept its gains to finish the week up 4.45%. The NZ market was relatively flat, up 0.34%.
Both the Reserve Bank of NZ and the Reserve Bank of Australia raised their respective cash rates last week. NZ’s OCR was raised by 0.50% to 3.50%, which was as expected by the market. The RBA however only raised the cash rate by 0.25% to 2.60%, compared to the 0.50% rise the market was expecting. This, coupled with dovish comments made by the RBA, meant that Australian equities rose, and the AUD fell. This is in contrast to the RBNZ, which has signalled a further increase in the last meeting of the year in November, citing a lower NZD and a resilient domestic economy.
A stronger than expected US jobs report on Friday caused a reversal of the recovery in equity markets during the week. The report showed a fall in unemployment, which means the Federal Reserve continues to face the battle of a tight labour market in reducing inflation. This means more pressure to continue raising rates, which caused equity markets to give up some of the gains made during the week.
It also means more USD strength. The NZD finished the week at US$0.5610 as the US Dollar Index remains at elevated levels. Commodity prices reversed their recent downward trajectory last week, with the Dow Jones Commodity Index increasing by 5.5%, and the price of Brent Crude oil increased by 11.9% to USD$98 per barrel.
Interest rates continued to rise in the US, with the 2-year Treasury rate up 12bps to 4.28%, and the 10-year Treasury rate up 14bps to 3.85%. NZ interest rates however were slightly lower over the week, with the 2-year swap rate down 1bp to 4.73% and the 5-year swap rate down 9bps to 4.46%.
In housing, NZ banks are now stress testing mortgage applications at interest rates greater than 8%. This is likely to further dampen housing demand, with banks lending 34% less against housing in August year-on-year.
Listed Property Vehicles (LPVs) are a great way for investors to gain exposure to the commercial property sector, without having to purchase a property or properties directly. They also allow investors to diversify into large property portfolios immediately, which would otherwise not be possible. For example, Kiwi Property Group owns a portfolio of over $3b of shopping centres and office buildings, including Sylvia Park in Auckland, while Goodman Property Trust owns over $4b of industrial property in Auckland. LPVs tend to offer a strong dividend yield, and form an integral part of an investor’s portfolio, especially those investors that are looking for immediate income. We are fortunate in NZ to have several LPVs listed on the NZX, covering all commercial property sectors: office, retail, and industrial.
Impact of Interest Rate Rises
We discussed in last week’s market update the impact of rising interest rates on the share market and the housing market. LPVs, generally being high-yielding stocks, are particularly vulnerable to interest rate rises, as the dividends have less relative appeal compared to safer investments like term deposits as interest rates rise. As such, we have seen their share prices fall over the last 12 months. The chart below shows the share prices of 7 NZ LPVs over the last 12 months, starting from a common base index of 100:
The above seven LPVs fell in value by an average of 21% over the last 12 months, with Goodman Property Trust having the lowest fall of 15%, and Stride Property Group having the largest fall of 31%. Goodman Property and Property For Industry both have exposure to the industrial property sector in Auckland, which has fared better than other sectors. Warehouse space remains highly sought after for logistics given the tighter supply chain for goods and the need to store more inventory, and indeed Goodman Property is currently developing more warehousing space in the growing Auckland market. For this reason, industrial property should hold its value comparatively well, and LPVs with industrial property exposure will suit more defensive investors at this time. We generally advocate diversifying into at least 2-3 LPVs to cover all sectors, and investors seeking more value might look to Kiwi Property Group and Stride Property at current prices.
Increased Dividend Yields
As share prices have dropped, this means the dividend yields for LPVs have risen, providing new investors with a higher income return for their investments. The table below shows a summary of each of the seven LPVs selected, plus Investore Property, and their forecast dividend yields and target prices.
A2 Milk has renewed its exclusive import and distribution arrangements with China State Farm Agribusiness Holding Shanghai Co for a term of five years from 1st October 2022. China State Farm has been A2 Milk’s distribution partner since 2013, and is the exclusive import agent for the company’s China label products, including infant milk formula.
Current Share Price: $6.27, Consensus Target Price: $6.62
Precinct Properties has secured Beca on a 12-year lease term at Stage 3 of the Wynyard Quarter Innovation Precinct. The leasing to Beca will require Precinct to commit to 117 Pakenham, the last building of the stage and the Wynyard Precinct. The Precinct CEO says securing an occupier like Beca so early in the stage highlights the value that businesses continue to place on high-quality, centrally located office spaces, particularly as employees are returning to the office environment.
Current Share Price: $1.28, Consensus Target Price: $1.46
THL has acquired the remaining 51% interest in the UK joint venture, for a purchase price of £5.355m (approximately NZD$10.7m), which has been paid via a cash payment of £1.350m, plus the issue of new shares to the value of £4.005m. THL CEO says the UK market has experienced a strong recovery following the pandemic and believes there are future growth opportunities.
Current Share Price: $2.76, Consensus Target Price: $4.32
Donor management system provider Pushpay has added the US Army Chaplain Corps as a customer. The US Army Chaplain Corps will be leveraging a tailored Pushpay software and apps solution for all of its ministries, which comprises 51 public service organisations, called garrisons, across the world. The addition of this customer represents an opportunity for future expansion of Pushpay’s solutions into a variety of public service organisations.
Current Share Price: $1.15, Consensus Target Price: $1.57
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