New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Real Estate Reflections — 177th&nbsp;Ed</h2>
September 2019 — Spring has Sprung
Despite August being a month which traditionally sees the least sun, the LPV sector was as luminous as ever, mirroring the performance that has preceded it in 2019. The sector ticked up +3.1% in August, with an historic 50bps OCR cut fuelling the continued success. August saw three LPVs announce results, all of which were largely inline with our forecasts. Our preferred LPVs are VHP (OUTPERFORM), KPG (OUTPERFORM), and IPL (OUTPERFORM).&nbsp;Target prices upgraded with new WACCs — little change to relative investment ratings
We have adopted our new risk free rate of 2% (down from 2.75%) and market risk premium of 7.5% (down from 7.75%) which is being rolled out across our research coverage universe. Given the relatively low asset betas in the listed property sector this has had a material positive impact on our DCF valuations. The level of impact on our target prices is less significant, but still material, given our target price is a 50% blend of our DCF valuations and our unchanged NAV valuations. While our target prices have lifted by +7% to +17% it has had little impact on our investment ratings. This is because our investment ratings are relative to the sector, not the wider equity market. We have downgraded AUG to NEUTRAL and upgraded KPG to OUTPERFORM reflecting relative valuation appeal after recent share price moves.
Property: the gift that keeps on giving
Other than the three steady results, activity in the sector was relatively subdued and yet the S&amp;P/NZX50 gross property benchmark was still up +3%, bringing the YTD return to an impressive +30%. Low interest rates continue to be the key driver of this return; however, property fundamentals remain very robust in terms of vacancy, rental growth, and supply and demand dynamics.
Revaluations a continued feature
The fears of a progressively weakening macro backdrop are yet to eventuate in reduced demand for prime industrial or office space. Rental growth and cap rate compression assisted the +6.2% revaluation gain for PCT, whilst VHP’s NTA lifted +2% to NZ$2.31 on the back of revaluation gains which were negatively affected by unfavourable financial derivative movements. PFI’s NTA per share of NZ$1.83 per share was up +3% on the back of a pleasing +8.8% interim revaluation gain to 13 properties in its portfolio.
Figure 1. NZ Listed property sector summary
<table class="table table-striped">
<thead>
<tr>
<td>
LPV
</td>
<td>
Code
</td>
<td>
Rating
</td>
<td>
Price
</td>
<td>
Target
</td>
<td>
Gross
</td>
<td>
AFFO
</td>
<td>
P/NAV
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
&nbsp;
</td>
<td></td>
<td></td>
<td>
4-Sep
</td>
<td>
price
</td>
<td>
yield
</td>
<td>
yield
</td>
<td></td>
</tr>
<tr>
<td>
Asset Plus
</td>
<td>
APL
</td>
<td>
NEUTRAL
</td>
<td>
$0.64
</td>
<td>
$0.65
</td>
<td>
8.1%
</td>
<td>
5.1%
</td>
<td>
97%
</td>
</tr>
<tr>
<td>
Argosy Property
</td>
<td>
ARG
</td>
<td>
NEUTRAL
</td>
<td>
$1.48
</td>
<td>
$1.35
</td>
<td>
6.1%
</td>
<td>
4.2%
</td>
<td>
114%
</td>
</tr>
<tr>
<td>
Augusta Capital
</td>
<td>
AUG
</td>
<td>
NEUTRAL
</td>
<td>
$1.51
</td>
<td>
$1.38
</td>
<td>
6.0%
</td>
<td>
4.8%
</td>
<td>
108%
</td>
</tr>
<tr>
<td>
Goodman Property
</td>
<td>
GMT
</td>
<td>
UNDERPERFORM
</td>
<td>
$2.18
</td>
<td>
$1.79
</td>
<td>
4.4%
</td>
<td>
2.9%
</td>
<td>
130%
</td>
</tr>
<tr>
<td>
Investore
</td>
<td>
IPL
</td>
<td>
OUTPERFORM
</td>
<td>
$1.94
</td>
<td>
$1.85
</td>
<td>
5.6%
</td>
<td>
3.9%
</td>
<td>
116%
</td>
</tr>
<tr>
<td>
Kiwi Property Group
</td>
<td>
KPG
</td>
<td>
OUTPERFORM
</td>
<td>
$1.64
</td>
<td>
$1.62
</td>
<td>
6.1%
</td>
<td>
4.0%
</td>
<td>
106%
</td>
</tr>
<tr>
<td>
Precinct Properties
</td>
<td>
PCT
</td>
<td>
NEUTRAL
</td>
<td>
$1.87
</td>
<td>
$1.60
</td>
<td>
4.8%
</td>
<td>
3.2%
</td>
<td>
120%
</td>
</tr>
<tr>
<td>
Property for Industry
</td>
<td>
PFI
</td>
<td>
NEUTRAL
</td>
<td>
$2.40
</td>
<td>
$2.00
</td>
<td>
4.5%
</td>
<td>
3.2%
</td>
<td>
122%
</td>
</tr>
<tr>
<td>
Stride Property
</td>
<td>
SPG
</td>
<td>
NEUTRAL
</td>
<td>
$2.35
</td>
<td>
$2.18
</td>
<td>
6.1%
</td>
<td>
3.9%
</td>
<td>
114%
</td>
</tr>
<tr>
<td>
Vital Healthcare
</td>
<td>
VHP
</td>
<td>
OUTPERFORM
</td>
<td>
$2.67
</td>
<td>
$2.69
</td>
<td>
4.9%
</td>
<td>
3.0%
</td>
<td>
115%
</td>
</tr>
<tr>
<td>
Core simple average
</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>
5.3%
</td>
<td>
3.5%
</td>
<td>
117%
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Company Reports&nbsp;
Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Real Estate Reflections — 177th&nbsp;Ed
September 2019 — Spring has Sprung
Despite August being a month which traditionally sees the least sun, the LPV sector was as luminous as ever, mirroring the performance that has preceded it in 2019. The sector ticked up +3.1% in August, with an historic 50bps OCR cut fuelling the continued success. August saw three LPVs announce results, all of which were largely inline with our forecasts. Our preferred LPVs are VHP (OUTPERFORM), KPG (OUTPERFORM), and IPL (OUTPERFORM).&nbsp;Target prices upgraded with new WACCs — little change to relative investment ratings
We have adopted our new risk free rate of 2% (down from 2.75%) and market risk premium of 7.5% (down from 7.75%) which is being rolled out across our research coverage universe. Given the relatively low asset betas in the listed property sector this has had a material positive impact on our DCF valuations. The level of impact on our target prices is less significant, but still material, given our target price is a 50% blend of our DCF valuations and our unchanged NAV valuations. While our target prices have lifted by +7% to +17% it has had little impact on our investment ratings. This is because our investment ratings are relative to the sector, not the wider equity market. We have downgraded AUG to NEUTRAL and upgraded KPG to OUTPERFORM reflecting relative valuation appeal after recent share price moves.
Property: the gift that keeps on giving
Other than the three steady results, activity in the sector was relatively subdued and yet the S&amp;P/NZX50 gross property benchmark was still up +3%, bringing the YTD return to an impressive +30%. Low interest rates continue to be the key driver of this return; however, property fundamentals remain very robust in terms of vacancy, rental growth, and supply and demand dynamics.
Revaluations a continued feature
The fears of a progressively weakening macro backdrop are yet to eventuate in reduced demand for prime industrial or office space. Rental growth and cap rate compression assisted the +6.2% revaluation gain for PCT, whilst VHP’s NTA lifted +2% to NZ$2.31 on the back of revaluation gains which were negatively affected by unfavourable financial derivative movements. PFI’s NTA per share of NZ$1.83 per share was up +3% on the back of a pleasing +8.8% interim revaluation gain to 13 properties in its portfolio.
Figure 1. NZ Listed property sector summary




LPV


Code


Rating


Price


Target


Gross


AFFO


P/NAV






&nbsp;




4-Sep


price


yield


yield





Asset Plus


APL


NEUTRAL


$0.64


$0.65


8.1%


5.1%


97%




Argosy Property


ARG


NEUTRAL


$1.48


$1.35


6.1%


4.2%


114%




Augusta Capital


AUG


NEUTRAL


$1.51


$1.38


6.0%


4.8%


108%




Goodman Property


GMT


UNDERPERFORM


$2.18


$1.79


4.4%


2.9%


130%




Investore


IPL


OUTPERFORM


$1.94


$1.85


5.6%


3.9%


116%




Kiwi Property Group


KPG


OUTPERFORM


$1.64


$1.62


6.1%


4.0%


106%




Precinct Properties


PCT


NEUTRAL


$1.87


$1.60


4.8%


3.2%


120%




Property for Industry


PFI


NEUTRAL


$2.40


$2.00


4.5%


3.2%


122%




Stride Property


SPG


NEUTRAL


$2.35


$2.18


6.1%


3.9%


114%




Vital Healthcare


VHP


OUTPERFORM


$2.67


$2.69


4.9%


3.0%


115%




Core simple average






5.3%


3.5%


117%




Source: Forsyth Barr analysis, Company Reports&nbsp;
Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Real Estate Reflections — 177th Ed: September 2019 — Spring Has Sprung

Asian property research and analysis, DimSum Property

Kang Ho Chong

Asian property research and analysis

DimSum Property

Established in Singapore, DimSum Property is a private fund-raising platform with an investment focus across the entire real estate value chain, designed to connect real estate players to investors, built on proprietary and well-researched content, and driven by fin-tech innovations.

Our research articles are written by the DimSum Property Research Team led by co-founder Kang-Ho Chong.

Thematic (Sector/Industry)

Bid to win, or bid to try your luck...Developers often enter into land bids with different strategies. They may aggressively “bid to win”, especially when their landbank has been depleted. Other times, they may choose to bid low, just to try their luck, hoping that no one else bids above them. Very often, these strategies will lead to different outcomes for their profit margins.<ul><li>Land is the most basic and important ingredient in a development project. In Asia, as land that is zoned for property development becomes more scarce, we see developers competing more and more aggressively for  land parcels, hence driving up land prices.</li><li>Given its relatively transparent and public data-rich land bidding system, we have chosen the Singapore land market as a case study to analyse and understand developers’ behaviours when they bid for land.  </li><li>Our model (between 2007-2016) suggests that since 2016, developers operating in Singapore have been finding it hard to win land parcels, due to greater competition for land. Combined with the pressing need to replenish their depleting landbank, many developers strategized to go all out to win in their land bids.</li><li>These aggressive bids have led to higher land costs and lower profit margins for developers, especially in an environment of falling home prices. We estimate net margins fell to ~15% in 2015, down from 22-36% in 2009-12. We expect them to continue lowering to single digits in 2016-17E.</li><li>Even in the face of a potential margin squeeze, many developers are still jumping in to bid for land, as they seek to fulfil “non-profit driven” strategies such as the need to restock, deploy cash, gain market share, or protect the value of a nearby land which they previously acquired.</li></ul>

Bid to win, or bid to try your luck...Developers often enter into land bids with different strategies. They may aggressively “bid to win”, especially when their landbank has been depleted. Other times, they may choose to bid low, just to try their luck, hoping that no one else bids above them. Very often, these strategies will lead to different outcomes for their profit margins.Land is the most basic and important ingredient in a development project. In Asia, as land that is zoned for property development becomes more scarce, we see developers competing more and more aggressively for  land parcels, hence driving up land prices.Given its relatively transparent and public data-rich land bidding system, we have chosen the Singapore land market as a case study to analyse and understand developers’ behaviours when they bid for land.  Our model (between 2007-2016) suggests that since 2016, developers operating in Singapore have been finding it hard to win land parcels, due to greater competition for land. Combined with the pressing need to replenish their depleting landbank, many developers strategized to go all out to win in their land bids.These aggressive bids have led to higher land costs and lower profit margins for developers, especially in an environment of falling home prices. We estimate net margins fell to ~15% in 2015, down from 22-36% in 2009-12. We expect them to continue lowering to single digits in 2016-17E.Even in the face of a potential margin squeeze, many developers are still jumping in to bid for land, as they seek to fulfil “non-profit driven” strategies such as the need to restock, deploy cash, gain market share, or protect the value of a nearby land which they previously acquired.

Land Market – Bid to Win, or Bid to Try Your Luck?

New Zealand

Kiwi Property Group Ltd is a property trust that invests in, manages and develops a portfolio of diversified properties throughout New Zealand. The Trust's properties include office, retail and industrial properties.

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Kiwi Property (KPG NZ)

Real Estate Reflections — 177th Ed: September 2019 — Spring Has Sprung

Real Estate Reflections — 177th Ed September 2019 — Spring has Sprung Despite August being a month which traditionally sees the least sun, the LPV...

Forsyth Barr

Land Market – Bid to Win, or Bid to Try Your Luck?

Bid to win, or bid to try your luck...Developers often enter into land bids with different strategies. They may aggressively “bid to win”,...

DimSum Property

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