New Zealand: Tapping into population-driven growth
14 November 2018
My recent trip to Auckland
highlighted that New
Zealand’s largest city is fast
becoming on a par with other
cosmopolitan cities across
the world.
Walking around central Auckland,
change is evident everywhere. Despite
my trip being mid-week, the streets
were bustling with construction, and the
restaurants full. The city is transforming
from a distant regional centre into a
cosmopolitan city on the world stage.
Big changes
When I last visited Auckland, getting from the airport to the
city was quite slow and painful (even off peak) due to
outdated and inadequate road transport infrastructure.
My recent journey was instead surprisingly pleasant, with
works recently completed at and around the airport – in
particular significant road-transport infrastructure upgrades
between the airport and the Auckland city centre.
On this trip I visited a range of real asset companies, giving
me a first-hand look at what the changing demographics and
landscape means for the New Zealand-exposed real assets in
the investible universe for our Martin Currie Australia Real
Income and Asia Pacific Real Income portfolios.
High migration and fertility rates
In the last 20 years, New Zealand’s population has grown by
approximately 1.2% per annum, from 3.8 million to 4.9 million
people1. The country has one of the highest developed world
migration rates, while its average fertility rates also remain
healthy at just over two births per woman2.
Recent gains can be partially attributed to a decline in the
number of New Zealand citizens departing overseas
(particularly to Australia), while more are returning (again,
particularly from Australia) to take part in the construction
boom that was stimulated by the growing population.
In my opinion, the market is
underestimating the dividend-growth
prospects that are backed up by the
ongoing population and construction
booms.
Building materials company Fletcher Building (not
held)* expects cost pressure to keep rising in
foreseeable years. It has seen labour costs rising
10% per annum, and materials costs at 3-4% p.a.
Management commented that there is a risk that
the government’s new KiwiBuild program (a multibillion-
dollar work programme set to deliver
100,000 homes for first home buyers over the next
decade) could over-stimulate the market and result
in even higher costs for materials and labour.
With new and returning migrants showing a preference to
live in the major cities, Auckland has had much greater than
average population growth, particularly in recent years, and is
projected to account for more than half New Zealand's
population growth between 2013 and 20333. Auckland
currently accounts for 33% of the total population4 and 38%
of GDP5.
Attractive place to live and work
Talking to a number of New Zealand peers, locals and
businesses during my trip, some key themes cemented as to
why New Zealand is proving to be an attractive place to live
and work:
- good wage growth, hence higher disposable income, due
to a shortage of workers created by the construction
boom
- much lower personal tax rates than Australia
- good government services such as schools and healthcare
- no State Government in New Zealand, therefore no state
bureaucracy or taxes.
However, some concerns were raised around the challenges
of migration-led strong house price growth, and talk from the
new coalition government of a potential capital gains tax.
Infrastructure playing catch up
The Auckland CBD and inner suburbs are rapidly
evolving to cater for this population-driven demand,
with significant construction activity across a wide
range of infrastructure, office, hotel, residential, and
shopping-centre projects.
However, despite the significant construction boom in
Auckland, a lot of the building work carried out to date
feels like it is still just playing catch-up with the growth
of the last 20 years, and a lot more still needs to be
done.
Management at inner-city business space developer
Precinct (not held)* also see construction costs rising
significantly, and supply not keeping up with demand.
The company believes the Auckland office and hotel
market will remain undersupplied until at least 2023.
Its management team commented that construction
capacity constraints are preventing significant office
build, and they have also seen some office withdrawals
for better uses (such as residential).
Demand for land from both industrial and residential pushing land prices
This demand is having a flow-on effect to industrial
property. Feedback from various industry meetings and
industrial property groups was that vacancy in Auckland’s
industrial property was less than 1%, despite the addition of
significant new space in recent years.
However, new land opportunities are tightly held and
difficult to secure, due to competition from residential
developments, and infrastructure is still playing catch up in
many areas. Demand for new space should outstrip supply
for many years to come.
Auckland International Airport (held in Asia Pacific Real
Income)* has a strong investment pipeline. Interestingly,
much of this development will be for its industrial portfolio,
which currently has no vacancies and many sites under
rented.
The airport has a large landbank that is only one-third built.
The benefit of this land is the good existing supporting
infrastructure relative to the rest of Auckland, meaning it
will be less expensive to develop.
Industrial and business space provider Goodman
Property Trust (held in Asia Pacific Real Income)*
management commented that the area around
Auckland is more land constrained than equivalent
Australian markets.
While a lot of mixed use land is currently used for
industrial sheds, the company is now competing
with the booming residential markets, resulting in
the exit of some industrial stock from the market,
and increased land values.
Weak dollar not a burden
The New Zealand dollar has weakened significantly
against the US dollar this year, and mildly against the
Australian dollar. However, there was no noticeable
sign of any concerns or impact in New Zealand. In
fact, business feedback during my trip, and recent
comments from the Reserve Bank of New Zealand
suggests the country is quite happy with the recent
softening of the currency, as it has improved the
competitiveness of various export industries and the
tourism sector.
Tourism also driving development
It’s not just the permanent population that is booming,
the tourism sector is also taking off. Auckland Airport’s
annual passenger volumes are now running at around
21 million per annum, compared with the 16 million per
annum three years ago**. To cater for the growing
passenger volumes, a second runway is being built.
Shopping-centre developments are also tapping into
the tourism market, titling their tenant mix towards
higher-end retail.
During my trip I met local management of ASX-listed
Scentre Group (held across all Income portfolios)*, and
toured two of its New Zealand assets, including the
premium Newmarket redevelopment shopping centre
development and the Albany shopping centre.
Newmarket has an inner Auckland high-income
catchment with good population growth of 1.9% in
catchment. Management says that demand for space
has been strong from both international retailers and
major domestic tenants, with the inbound tourist
market a key factor.
The Albany region is one of the three areas identified
by the Auckland council as an area to facilitate growth
outside the city centre. Population growth in the
Albany corridor is also running at around 2%, and
according to Scentre, retail spend is 11% above the
New Zealand average. The site has a significant
landbank, some of which is currently used for parking.
The new CEO of Kiwi Property Group (held in Asia
Pacific Real Income)* is ex-Westfield USA, and he
mentioned that the key attraction for him was
development opportunities within the portfolio,
particularly mixed-use opportunities.
We toured Sylvia Park, a key asset and mixed-use
retail/office site which benefits from rail connections
as well as great bus and road connections, and
development potential.
While Sylvia Park is not positioned as a luxury centre,
the CEO sees Scentre’s Newmarket stimulating
overall international retailer demand and which will
benefit Sylvia Park’s tenant mix.
The CEO also mentioned that floor space per capita
in New Zealand is very low relative to the US and
even Australia, and the strong population growth
justifies all the new space coming into NZ. A very
different story to declining US Malls. New Zealand
malls are also not fashion-heavy so they are much
better diversified.
Tapping into under-appreciated growth
My recent trip to Auckland re-affirmed that New Zealand’s
largest city is fast becoming on a par with other
cosmopolitan cities across the world.
From an investment point of view, the growth that has been
seen here in recent years is exciting.
The spot yields for New Zealand real asset securities are
attractive on a global and regional basis. However, in my
opinion, the market is underestimating the dividend-growth
prospects that are backed up by the ongoing population and
construction booms.
My trip has given me increased confidence in the companies
which are already held in our Real Income strategies, as well
as presenting a range of potential new investment
opportunities to be dissected by the team back home.
* The information provided should not be considered a recommendation to purchase or sell any particular security. It should not
be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
** Source: company reports.
1 Source: Stats NZ; estimated resident population of New Zealand; as at 30 June 2018.
2 Source: Stats NZ; total fertility rate; 10-year average as at 19 February 2018.
3 Source: Stats NZ: Subnational population projections; as at 8 March 2017.
4 Source: Stats NZ; Population of Auckland Region and New Zealand: 2013 Census.
5 Source: Stats NZ; Regional gross domestic product: year ended March 2017.