Dialogue: What's wrong with property investment

By EDWARD SCHUCK*

In Weekend Property in the Weekend Herald (Business Herald, September 8), Brent Sheather argues that my views on property investment are without merit.

Mr Sheather's argument missed the main point of my comments. For most New Zealand investors, even the large institutional ones, direct investment in New Zealand property is not worthwhile.

I agree that institutional investment in property globally is on the rise, helped by the wave of securitisation that started in the United States (in the form of Reits - real estate investment trusts) and came ashore in Japan and Europe. Listed and unlisted securities are a superior form of property investment for pension funds, charitable trusts and endowments which require such things as liquidity, transparency and diversification.

And a diversified exposure to property can be a good thing to include in a multi-asset portfolio.

But it is extremely difficult for even the largest New Zealand investors to construct a well-diversified portfolio of buildings. They simply do not have enough money to build a large enough portfolio.

Furthermore, the market for institutional-grade property in New Zealand is illiquid because of the small number of players and relatively high transaction costs, and the quality and quantity of information is relatively poor.

Some investors do not need much convincing of this. They have painful memories of owning New Zealand properties. Returns in some sectors have been poor, even over the long term.

This is part and parcel of the extended booms and busts that can occur in a place like New Zealand, where a single new building or subdivision can create several years of new supply. I wholeheartedly agree with Mr Sheather's view that historic performance is no indicator of the future. But these memories affect investors views of the New Zealand property market and must be reckoned with.

Alternatively, investors can gain more diversified exposure to New Zealand property through wholesale and retail pools such as the funds promoted by investment managers, and the companies and trusts listed on the Stock Exchange.

Unlisted pools do not solve the liquidity issue entirely, since they must buy and sell properties just like a direct investor. Even listed units and shares do not trade in great quantities.

Also, the range of products in New Zealand is narrow, and some investors remain suspicious of the quality and motivations of management. These suspicions are not entirely without grounds. The road to property investment is strewn with casualties of the past 20 years.

Distressed syndicates, failed and restructured public companies and trusts and defaulted debt obligations have all featured in recent history.

To some extent, these are a result of the public's fixation with high initial yields which, according to Mr Sheather, help to make property the most attractive asset class.

High initial yields are, however, small consolation in a world of negative capital returns. And there is little evidence that investors are able to forecast when these will occur. Thankfully, the New Zealand property industry is working to improve its standing in the world of institutional investment.

* Edward Schuck is a senior consultant in the Auckland office of Frank Russell Company. He is also a member of the research committee of the Property Council and a former senior lecturer at the University of Auckland.