KEY POINTS:
Commercial property was the star performer during the March quarter for New Zealand's largest fund manager AMP Capital Investors, which continues to see the sector as a "hot prospect" for the rest of the year.
In its quarterly investment update, AMP, which manages about $12.5 billion on behalf of New Zealand investors, said its balanced funds produced "more modest" returns during the three months to March compared to what was an "exceptional" performance last year.
The standout asset class over the quarter was New Zealand property, which returned 7.8 per cent over the period compared with local shares at 2.6 per cent, unhedged global shares at 0.6 per cent and cash at 1.9 per cent.
"Property remains a very hot prospect for a couple of reasons," said chief investment officer Leo Krippner.
New Zealand non-residential property offered rental yields of around 8 per cent compared with 6 per cent in Australia or 5 per cent for the rest of the world. Any contraction of local yields to match those overseas would likely be offset by capital gains.
Krippner said the new portfolio investment entity (PIE) regime was also likely to provide a boost to commercial property investment.
"We've already seen that impact on listed property trusts. They can get the same tax treatment as an individual gets from owning property directly but will also be able to limit their top tax rate to 33 per cent.
"We think that valuation uplift will gradually be reflected in valuation uplifts of buildings like those owned by AMP Property Portfolio."
Stephen Costley, general manager of direct property investor AMP Property Portfolio, said his fund had produced a gross return of 21.5 per cent last year.
Local market fundamentals, including high rental yields and low vacancy rates, remained strong, a fact that had not escaped overseas investors.
"In the last three months I would have spoken to investors from Germany, Switzerland and a continuing stream from Australia."
AMP Property Portfolio had forecast a gross return of 16 per cent over the year, but the gross return had been 27.5 per cent.
Krippner said the more modest overall performance of AMP's balanced funds over the "bumpy" March quarter was primarily due to muted gains by international sharemarkets.
AMP had forecast a 16 per cent return from unhedged global shares over the year. The first quarter's performance annualised would have produced a return of 2.5 per cent, with much of the underperformance related to the New Zealand dollar's appreciation over the period.
AMP expected international sharemarket returns over this year to be more modest than last year, mainly because markets were now looking more fully priced.
"But equally, the global economic backdrop means there is no reason to expect low or negative returns."
Krippner also noted New Zealand's sharemarket was now trading at a new post-1987 price-to-earnings ratio high of 17.6.
However, several factors including ongoing interest from overseas private equity players would continue to underpin the local market.
"We're still expecting returns of about 10 per cent."
