Listed property stocks set to soar
Listed property trust shares are set to soar if New Zealand enters a sustained period of inflation, according to NZ Funds Management.
Monday, September 28th 2009, 10:18AM 
1 Comment
by The Landlord
In an inflationary environment few asset classes do better than property. NZ Funds research shows there is a very high correlation between inflation and property.
Chief investment officer Michael Lang says in the last couple of years investors have been focused on protecting their capital and guarding against the ravishes of deflation. But the future of investing will be all about guarding against inflation as the government prevents the economy from being stifled by keeping interest rates low.
"Property also performs in line with a rising sharemarket during periods of low inflation so it is a "win-win" investment. Global inflation peaked during the periods 1945 to 1948, when it was 9.60% annually, 1972 to 1982, when it was 8.90% annually and 1989 to 1990 when it was 5.60% annually.
"For almost two years now property as an investment has hit the headlines for all the wrong reasons, which is exactly why it makes sense to look at it now," Lang says.
Its attractive attributes include the certainty of its business model and that a large proportion of returns are derived from yield which is relatively stable.
But not all property will be a good investment.
"The first distinction investors need to make is between unlisted and listed property. Buying either a rental property or commercial property is not an investment proposition, it is a business proposition," he says.
"Investors who buy property directly or through a syndicate expose themselves to all the risks of property investing." This includes tenant risk, property price risk, interest rate risk, bank covenant risk and liquidity risk - in a highly concentrated manner.
"If anything goes wrong it might take six or more months to sell your property or longer if you are part of syndicate. This means the normal risks associated with property investing get put on steroids if things go wrong," says Lang.
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Vacancy levels are rising, which is leading to decreased rentals, as competing landlords scramble to fill their vacant space and keep their banks happy.
Alot of development land is for sale now, and at alot lower cost than the 3 to 5 year period. This will in turn lower the rental necessary to attract tenants away from older premises. This may take another couple of years to happen, as most businesses are contracting.
Further, banks are indicating the cost of funds is likely to increase in the short term. Not that I buy into this, but if the do property values will decline as their should always be a margin between lending and return to reflect the risks of ownership.
I wont be investing in NZ Funds Management while Mr Lang is there. The only thing I agree about his statement is that Auckland will receive most of the migrants.