A number of investment houses are in a sell-down mode, discarding property assets to reduce any increasing debt percentage as the current market value of their portfolio's fall. Other fund managers, with less liquid and higher value assets are undertaking capital placements and rights issues to maintain existing Loan to Value Ratios (LVRs) on their assets and reduce the cost of gearing.
We have witnessed the demise of a number of Australian Real Estate Investment Trusts (REIT's) over the last year, brought about primarily because funding was withdrawn due to concerns over their investment models and their ability to service debt. In good times, two strategies were introduced to enhance the underlying investment return from investment portfolios, the introduction of high levels of gearing and taking on development risk. The focus was on recycling capital in order to generate a strong earnings stream. Capital was freely available and developments appeared to carry little downside risk.
However, when the "wall of money" that provided that gearing disappeared, developments began to falter. The actual risk that was being incurred across a portfolio became apparent and the underlying revenue streams generated by the investment asset became critical. As Warren Buffet said "It's only when the tide goes out that you learn who's been swimming naked". When everyone was enjoying good times, you just didn't know who had taken on excessive risk.
By comparison however, the New Zealand property sector was more conservative in its approach to risk, with investors here mindful on how gearing a property portfolio can alter its investment characteristics, both positively and negatively. Whilst most have both geared and developed, it does not appear to be to the same extremes of our trans-Tasman cousins. Property investors are certainly more discerning when it comes to the quality of manager and their investment strategy, rather than just focussing on investment yield.
The issues being currently reported by property owners revolve around ensuring balance sheet stability and addressing banking concerns, rather than significant underlying performance issues with property assets (to date at least). Undeniably, property values have fallen driven by sales, retail spending is down, and office vacancy is on the increase.
However, New Zealand investors are able to correctly price risk and make informed investment decisions, given a high level of transparency in the New Zealand property market. According to a 2008 survey by real estate specialist Jones Lang LaSalle, Australia, the US and New Zealand were top of the list for the most transparent property markets from the more than 50 countries that were assessed. New Zealand is a role model according to the company, owing to its legal and regulatory procedures. The fact is that the majority of New Zealand property vehicles remain in a position to secure funding - be it by renegotiated bank debt or successful capital raisings, even in this very challenging market. The various capital raisings and debt refinancing schemes currently being undertaken will end with long term value outcomes for all stakeholders.
Long term investors are seeing the current state of the property market as one of opportunity, despite continuing short term volatility.
The property sector is not starved for cash - but nor is it awash. Discerning equity remains available (at a cost) to reputable, prudent, transparent fund managers, who operate uncomplicated, value adding investment models. The fundamentals of property as an asset class are simple - and should remain so.
Read the full TOWER May 2009 Portfolio here.