Commercial property’s interest rate pain - a value investor’s gain?

Listed commercial property companies collectively own $20 billion worth of office, retail and industrial assets across New Zealand, but that value is expected to fall by millions more as higher interest rates take hold.

This cyclical event of declining asset values was more painful than the global financial crisis because it was coupled with rising debt costs, Forsyth Barr senior equities analyst Rohan Koreman-Smit told Markets with Madison.

“We’ve currently got interest costs where investors raising debt to buy some of these assets need to pay 7 or 8 per cent. Making that work from an investment basis ... is tough.”

The market had already priced the pressure in, with real estate under-performing the broader NZX Top 50 index for the majority of the past 12 months.

However, the firms were all trading at a discount to their net assets, suggesting they could be a value investment.

“That’s the million dollar question ... Are they absolutely cheap?”

Watch Koreman-Smit answer that question in today’s episode of Markets with Madison above.

Plus, Vital Healthcare Property Trust fund manager Aaron Hockly reveals how it’s managing higher interest costs as it develops more private hospitals.

He explains what Vital will do when it runs out of debt headroom in 12 months’ time - a hint, investors should expect lower returns.

Get investment insights from the experts on Markets with Madison every Monday and Friday on the NZ Herald.

Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

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Madison Reidy is the host of New Zealand’s only financial markets show, Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.