Archive | Property Council returns

Property Council index goes walkabout again

The Property Council’s annualised quarterly index was down from June to September, but rose in the September quarter compared with a year earlier, just like it did in the March quarter. One very helpful reason for the better look in September is that the March quarter figure was revised downward.

I’ve written about the index figures changing before and, again, the reason for the better look of the graph wasn’t publicised.

The index is compiled by the Australian office of MSCI and is still known as the Property Council/IPD NZ property index. MSCI Inc of New York took over IPD Group Ltd of London in 2012. MSCI is best known for its global indexes. IPD measures commercial real estate markets and has been running a New Zealand index with the Property Council since 2007.

When MSCI executive director Anthony De Francesco presented the March quarter update in May, his chart showed the return on all property up from 12.1% in the March 2015 quarter to 13.9% in the March 2016 quarter. However, a revision since then shows the March 2016 return at about 12.9% – a 100-point cut.

The return rose to 13.1% in June, then fell to 12.7% in September.

Dr De Francesco said “the market appears to be stabilising, with the September quarter results showing a slight softening to the June quarter.”

Last year, Property Council chief executive Connal Townsend said only 15.3% of assets were revalued during the September quarter: “Due to the low levels of asset revaluations in the sample, it is important that users are fully aware that the risk of stock-specific circumstances disproportionately impacting sector and even all-property returns is high. The figures should therefore be treated as only indicative of market performance and should be considered within that context.”

But the index is given wider circulation than simply to Property Council participants.

After the latest results appeared again to make it hard to compare with a moving target, I emailed Dr De Francesco for an explanation.

Returns on the IPD property index to March 2016.

Returns on the IPD property index to March 2016.

My first email: I’ve just asked the Property Council NZ to send me the index information you presented yesterday, because the latest annualised total return is lower than that in March. For both March & September I’m using your figures. Is there a simple explanation?”

My second email: “The quarterly annualised return chart I was looking at was for March, showing a 13.9% return. On your long-term chart to September, that looks to have fallen to about 12.9%, so a decline from March through June to September has turned into a rise to June then a fall to September. But a 1% drop is big in just 6 months, and the June & September figures could also change substantially, so it’s hard to say there’s any trend at all.”

His response: “Yes, the return stats are different due to changing valuation profile. The return index results for June 2016 were based on a relatively very low sample. The Sep results is based on a significantly larger sample. Our methodology recomputes the June index results and prior results using a linear interpolation technique that back-fills missing quarters. It’s this variance in the valuation profile that gives rise to the changing return profile.”

That’s nice to know. But for me it means the index is unreliable because outsiders aren’t informed of the revisions, or their timing or reasons, so the graphs presented in this story are here only to illustrate the changeability of the index. I don’t feel I can rely on either the long-term performance charts or the quarterly figures.

Earlier stories:
25 May 2016: Industrial leads property returns index
11 November 2015: Low valuation level makes commercial property index “indicative-only”
16 May 2014: Property index figures go for a walk
2 December 2012: MSCI completes IPD takeover
Attribution: Property Council release, De Francesco response.

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Industrial leads property returns index

The total annual return on the Property Council’s quarterly commercial property index, produced by IPD, rose to an annualised 13.9% in the March quarter.

The return in the previous quarter was 12.5% and the 10-year average is 9.9%.

nzret1605In the latest index update, industrial was the clear leader with a 15.8% return, followed by retail on 14.3%, office 11.3%. The lift in returns is almost entirely the result of a climb in capital returns. The research showed average cap rates for office at 7.1%, retail 6.8%, industrial 6.9%.

Property Council chief executive Connal Townsend said the returns demonstrated a booming commercial property market: “The results show a high level of confidence in this sector and, for the last several years, the index has been delivering strong returns steadily.”

The index database comprises property assets held by 20 funds with a combined asset value of $14.1 billion, representing 563 investments.

Attribution: Property Council release.

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NZ commercial property outperformance based on industrial & retail growth

The New Zealand commercial property market has outperformed globally over the last 5 years, according to the Property Council’s latest research.

Australia was also ahead globally, but the New Zealand market had fared better than Australia over that period too.

2010 was the turnaround year for New Zealand commercial property. The Property Council/IPD commercial property index recorded a 2.4% total return for the year to March 2010 – the first positive annual return since December 2008. The total return to December 2009 had been minus 1.6%.

What is now the MSCI NZ all property index shows a total return by the New Zealand market of 11.7% for the March 2015 year, up from 11.3% for the December 2014 year and above the long-term average of 10.6%.

MSCI (Morgan Stanley Capital International) vice-president Dejan Radanovic said Auckland capital growth had increased from 3.9% in 2014 to 5.6% in the year to March 2015, but Wellington’s recovery was more muted with capital returns of 1.2% in 2014 and 2% this year.

The Auckland industrial total return for the latest year was 12.8%, up from 10.9%, with the capital component rising from 2.7% to 4.8%.

The Auckland retail total return rose from 10.6% to 12.4% and the office sector was stable, with a return growing from 0.7% to 10.9%.

Attribution: Presentation, release.

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Commercial property index slips

Published 3 June 2011

The IPD/Property Council commercial property index slipped a point from December to show a 5.9% total return for the March quarter, but still up from the September quarter’s 5.4%. The long-run return is 10%.

The latest index result showed an 8.3% income return, negative 2.2% capital return, compared to an annualised negative 2% in December. IPD presented an index for the December quarter showing a 9.4% total return, 0.9% capital growth, 8.4% annualised income return.

The index, compiled by Australian research company IPD for the Property Council, provides a broad measure of investment return for the commercial property market in New Zealand. The index database is made up of property assets from 13 entities with a combined asset value of $9.1 billion.

IPD’s managing director in Australia & New Zealand, Anthony De Francesco, said the results suggested the overall commercial property market was moderating, with the speed of the upswing slowing: “This is supported by various macroeconomic indicators (such as employment growth & retail sales growth), which are pointing towards a soft economic outlook over the short term.”

However, Mr De Francesco said the speed of the recovery would continue to vary across sectors, with the industrial sector continuing to outperform retail & office due to relatively favourable market conditions.

Industrial property outperformed the office & retail sectors with a total return of 9.2%. The retail sector delivered a return of 4.9%, up 140 points. Cap rates over the quarter stood at 8.4%, up 10 points, driven by the small increase in the retail sector’s average cap rate.

“Against selected global property markets, the New Zealand & Australian property markets compared favourably in terms of less pronounced post-global financial crisis slowdowns. In contrast, property markets for the UK & US experienced particularly pronounced downturns. Currently however, New Zealand’s annual capital return on quarterly periods is trending against the current positive directions of both the Australian & Canadian property markets, decreasing by 20 basis points to -2.2% for the March 2011 year. This reflects the uncertainty in New Zealand retail asset values, economic growth prospects & consumer spending.

“Return profiles for direct & listed property markets display distinct differences, especially over the short term. A clear distinction between the 2 investment structures is the trade-off between liquidity offered by listed property entities and lower volatility exhibited by direct property markets.”

 

Annualised listed returns were 9.4% for the March 2011 year (17.8% in 2010), direct property 5.9% (2.7%).

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Attribution: Company release, story written by Bob Dey for the Bob Dey Property Report.

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Commercial property index records positive capital return

Published 9 March 2011

The Property Council’s quarterly index, produced in conjunction with Australian research company IPD, has shown its first positive annual capital growth since June 2008. The index for the December quarter showed 0.9% capital growth, 8.4% annualised income return and a 9.4% total return.

The index provides a broad measure of market performance for commercial property based on a sample of 345 properties with a value of $8.2 billion.

IPD’s managing director for Australia & New Zealand, Anthony De Francesco, said the result reaffirmed an upward trend in returns since the trough in June 2009. However, he said returns were likely to moderate with a softening in the macro-economy.

The December 2010 result represented an improvement of 3.5 percentage points over the previous period, mainly caused by capital values turning positive.

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Attribution: Property Council release, story written by Bob Dey for the Bob Dey Property Report.

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Second positive quarter for Property Council index

Published 17 September 2010

The Property Council’s June quarter property index, produced in conjunction with Australian research company IPD, shows a 3.6% total return for the June year, up from 2.6% in the year to March. Total annual returns for the previous 4 quarters were negative.

IPD’s managing director for Australia & New Zealand, Anthony De Francesco, said the improvement came from a slowing in the decline of capital values.

The Property Council/IPD index was released on 1 September, but is one of 3 research reports I’ve posted on the website on 17 September.

The latest total return consisted of an 8% income return, reduced by a negative 4.2% capital return which reflected a slight downward adjustment to capital values.

Dr De Francesco said the rolling annual nominal total returns, split by income & capital return, clearly highlighted that the commercial property investment market was progressing through the recovery phase of the investment cycle, although moderating: “Going forward, the recovery profile for returns is likely to be mild rather than sharp, due to a combination of weaker macro-economic activity & adverse capital market conditions.”

IPD NZ advisory group chairman Alan McMahon said:“This data confirms what investors are telling us – that the yield adjustment phase for prime properties is coming to an end and they are looking forward to a period of stability.”

A summary of the investment performance across the core property sectors showed annualised total returns of 0.2% for office, 6.2% for industrial, 7.3% for retail: “Importantly, this represents an improvement over the previous period, with all property sectors reporting positive returns. The positive performance of the sectors was driven by an improved capital return which, although still negative, was more than offset by the income return. The improvement in capital returns reflects a deceleration in asset writedowns and levelling out of cap rates. The poor return performance of the office sector reflects weak space market fundamentals.”

Dr De Francesco added: “While sector returns are expected to improve, softening macro-economic conditions are likely to cause the pace of the recovery in each sector to moderate. This will be reflected in softer demand across the commercial property market.”

A positive attribute of the index was that the New Zealand market had experienced a relatively mild downturn compared to other major property markets: “The UK & US experienced the greatest decline in total return as they were adversely impacted by the spillover from the global financial crisis. Notably, the New Zealand property market moves closely in line with the Australian property market. Over the short term, New Zealand is expected to perform favourably against competing property markets globally.”

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Attribution: Property Council release, story written by Bob Dey for the Bob Dey Property Report.

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Commercial property index positive for first time in 18 months

Published 3 June 2010

The Property Council/IPD commercial property index recorded a 2.4% total return for the year to March – the first positive annual return since December 2008. The total return to December was minus 1.6%.

 

The March return was made up of a positive 8.1% income return and a 5.3% capital decline

 

IPD’s managing director for Australia & New Zealand, Dr Anthony De Francesco, said the March quarter results clearly reflected an early recovery cycle for the commercial property market: “It reflects a relative improvement in capital market conditions and a move towards more favourable macro-economic conditions. Consequently, investors & property managers should be reassessing their

portfolio strategies to take advantage of the upturn.”

 

IPD NZ advisory group chairman Alan McMahon said the results reflected previously expressed views that market sectors tended to enter & exit downturns in the same order – industrial first, then retail and office last. “Barring external shocks, we would expect to see this improving trend reflected over the balance of the year.”

 

Annualised total sector returns were minus 0.5% for office, positive 6% for industrial, 4.4% for retail. Dr De Francesco said: “The favourable return performance for the industrial & retail sectors was driven by an improved capital return which, although still negative, was more than offset by the income return. The improvement in capital returns reflects a clawback in asset writedowns and levelling out of cap rates. The negative return for office reflects a combination of factors – higher vacancies due to weak demand, lower expectations of future rental growth and upward movement in yields.”

 

He said the comparatively mild downturns in property markets in Australia & New Zealand reflected strong banking sectors & resilient labour market.

 

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Attribution: IPD & Property Council release, story written by Bob Dey for the Bob Dey Property Report.

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Big downward swing in office values, other sectors not indexed

Published 31 August 2009

IPD, the Melbourne-based organisation that compiles the NZ Property Council’s property index, said on Friday it didn’t have enough valuation information to produce an index for the second quarter.

 

IPD managing director John Garimort said: “To meet IPD quality requirements there must be at least 20% valuation evidence in the most recent quarter for index results to be published.

 

“The lack of valuation evidence means that returns, particularly capital returns, will be artificially smoothed and will underestimate market movements. Further to this, the heavy weight towards the office sector would mean composite property (all property) returns would not reflect the whole market.”

 

In the June quarter, retail valuation evidence equated to only 8.3% of the sector’s capital value, industrial 1.6%, all property 18.5%.

 

However, there was enough valuation evidence to do the office index, with 40% of the sector’s capital value assessed in the quarter.

 

The cbd office total return for the June year was a negative 5.2%, compared to a positive 14.7% the previous year. Mr Garimort said the 2009 return was the lowest in 16 years.

 

Income returns continued to offset losses from capital writedowns, rising slightly to 7.2% for the year.

 

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Attribution: IPD & council releases, story written by Bob Dey for the Bob Dey Property Report.

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IPD index hits negative territory

Published 7 June 2009

The Property Council’s quarterly index, compiled by IPD of Melbourne, fell 0.8% for the March 2009 year.

 

IPD began compiling the Property Council index in 2007 and has worked its figures back to 1994. It said this was the first year since then there’d been a negative return.

 

Capital values fell 7.5%, the first negative capital return in 7 years, but income returns rose 7.3%.

 

IPD described the overall return for the year as “a sharp reversal of fortunes from the March 2008 return of 18.3%”.

 

IPD held the March 2008 return up as robust, compared to a 16.4% slump in the NZX All Ordinaries LPT index. This time the NZX index didn’t crack a mention. But, in any case, the IPD wasn’t too robust in March 2008. A closer examination of its quarterly movements showed the index peaked with a 24.1% total return gain in June 2007, was down almost 2 percentage points in the next 2 quarters then started to decline more seriously.

 

By June 2008 the total return was 13.5% – 44% lower than a year earlier.

 

IPD uses its statistical releases more as sales material than for the provision of reliable & comparative assessment, so I haven’t used its quarterly releases since last September.

 

It provides sector figures for the latest quarter, without comparisons.

 

Earlier story:

6 June 2008: Property Council index shows “robust” 18.3% return – but it’s an 18.3% decline from previous quarter

 

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Attribution: Property Council/IPD release, story written by Bob Dey for the Bob Dey Property Report.

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Commercial property returns quickly head downward

Published 9 September 2008

Commercial property returns have fallen 26% in just 3 months, the Property Council/IPD NZ property index shows.

 

IPD said falls in the office sector in just 6 months ranged from 44-61%.

 

The index rose until the June 2007 quarter, dropped just under 2 percentage points in the next 2 quarters, then started falling more seriously.

 

The total return for ungeared direct commercial property investments was 13.5% in the June 2008 quarter – down 44% from the 24.1% total return in the June 2007 quarter.

 

The market held its strength over the last 2 quarters of 2007 – returns of 22.3% in the September quarter, 22.4% in December. Since then, returns have been distinctly downward – 18.3% in March (an 18.3% decline in one quarter) and then to 13.5% (the 26.2% decline for the latest quarter).

 

Capital growth on Auckland cbd office property fell from 15.7% in December to 8.4%, in Wellington it fell from 19.4% to 6.6%, and for non-cbd Auckland property it fell from 7.6% to 3.7%.

 

IPD research manager Jess Moyer said retail property’s annual return dropped to 12.4% in June, lower than industrial, after peaking at 28.7% only one year earlier. The fall in shopping centre capital growth was the main culprit, going from 21.6% growth a year ago to 4.8% in the year to June 2008.

 

“75% of shopping centres in the database have been revalued in either the March or June quarter and valuers have clearly taken the different economic climate into account when selecting their cap rates. We would expect to see similar reductions in capital growth in the remaining 25% of the remaining shopping centre assets when their revaluations come through.”

 

Industrial probably held the steadiest. The capital return fell from 7.1% to 4.1% but income returns only fell from 8.5% to 8.2%, for a total return down from 16.2% to 12.5%. Ms Moyer commented: “With close to 35% of industrial assets in the database still to be revalued this year, we expect the downward trend to continue.”

 

Website: IPD index details

 

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Attribution: IPD/Property Council release, story written by Bob Dey for this website.

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