However, the advantages and opportunities of investing in commercial property (office, retail and industrial property) are not as widely known and, generally, people are less familiar with how to make such an investment.
The commercial property sector has performed strongly in recent years, generating substantial returns through good growth in market rents and asset values, as well as high occupancy rates. Head of Investment Strategy for AMP Capital Investors New Zealand, Leo Krippner, says: "So far this year, New Zealand property has been the standout asset class in our balanced funds, returning 8.8%. And over longer periods, returns have been comparable with shares while providing welcome diversification in our funds."
"More importantly, New Zealand property continues to offer attractive returns going forward. Even with solid capital appreciation over recent years, we believe strong rental growth has maintained a prospective gross yield of 8% and that's before any additional capital appreciation. By comparison, current rental yields on residential property are only around 4.5%."
Krippner invests mainly through the AMP Property Portfolio (APP) run by General Manager Stephen Costley. With his team of nine property specialists, Costley manages a $1.5 billion portfolio of over 50 high quality retail, industrial and office properties. APP has returned 16.5% annualised over the last five years to 31 May 2007. In addition to offering comparatively high yields, he says another advantage of investing in commercial property is the duration of cash flow provided by a large number of quality tenants.
"Our weighted average lease term is over five years, which means income from over 700 tenants is contracted over that period. The quality of that cash flow is also high with government, listed companies and significant legal and accounting firms occupying space in the portfolio."
And investing in a slice of an Auckland and Wellington CBD high rise, a major shopping centre or industrial park is probably easier than you think. Investors can tap into the commercial property market through investing in funds such as the AMP Capital Investors New Zealand Property Fund, which currently has a 70% exposure to the APP, through AMP Financial Services and RaboPlus.
"Investing in commercial property is generally beyond the average New Zealander's reach, which is why managed property funds are a good option for most investors," says Costley.
In addition to making commercial property more accessible, Costley says there are several reasons why managed property funds are a good idea: "You avoid the hassle of managing your own property and it is a liquid form of property, allowing you to buy and sell your units with relative ease. Finally, it allows for better diversification with investment spread across different sectors and locations."
And Krippner says the outlook for commercial property in New Zealand is good due to the portfolio investment entity (PIE) regime coming into effect on 1 October. "Individuals who invest in listed property trusts or direct property which are PIEs will get the same tax treatment as those who own property directly, but will be able to limit their top tax rate to 30%. That will add a nice after-tax kick to the attractive yields already on offer and will probably boost the prospects for capital appreciation at the same time."
About AMP Capital Investors
AMP Capital Investors offer a range of diversified and sector managed funds through RaboPlus. AMP Capital Investors is New Zealand's leading specialist investment manager, managing over $12 billion* for New Zealand investors.
With almost 200 in-house specialist investment professionals across New Zealand and Australia and a carefully selected global network of investment partners, the AMP Capital Investors group offers significant depth and breadth of investment expertise. Our approach enables us to offer world-class investment solutions to create greater wealth for our clients through better investment decisions and opportunities.
Our aim is to deliver superior investment performance for our clients. Reliably, consistently and repeatedly.
* As at 31 March 2007.