Floods, cyclones and rate hikes: New Zealand investment update
24th February 2023Commercial Real Estate Investors Market Review Thought Piece
On 12 February 2023, Tropical Cyclone Gabrielle hit the North Island of New Zealand causing widespread damage estimated to be at least NZD$13.5bn (AUD$12.3bn) (NZ Finance Minister).
New Zealand declared a national state of emergency on 14 February 2023, extending the existing states of emergency in Auckland and the Coromandel which were in place due to recent floods.
Markets remained neutral on the announcement that the RBNZ raised the official cash rate from 4.25% to 4.75% in its February meeting this week, with a terminal cash rate still forecast at 5.50%.
We have closely monitored the weather events over the past month and assessed possible direct and indirect impacts on our assets. Fortunately, there has been no material damage reported to our secured assets across 11 loans in New Zealand. Two of the loans have construction exposure (a hotel in Auckland and a town center development in Mangawhai), both experienced two-week project delays, but no damage to sites.
Our portfolio allocation to New Zealand investments as of the end of January is 34% in the Merricks Capital Partners Fund and 14% in Merricks Capital Agriculture Credit Fund.
Geographical diversity across Australia and New Zealand is one of our key portfolio risk management tools. When assessing lending opportunities in the New Zealand market we focus on:
- Conservative attachment points to security assets (63% weighted average LVR across our NZ loans);
- The use of floating rates (78% of our NZ loans are floating by value);
- Having local expertise to monitor assets or projects; and
- Generating target investor returns of cash rate plus 6-7% premium (current forecast investor IRR for NZ loans is 11.7% net of costs).
We expect to manage net repayments of $75-$100m from New Zealand loans maturing in the coming months and see the Merricks Capital Partners Fund capital exposure to NZ decreasing to <25% FUM by September 2023 and the Merricks Capital Agriculture Credit Fund maintaining a 10-20% NZ exposure during the same period.
Opportunity in the West – Positive fundamentals emerging in the residential sector
On 12 February 2023, Tropical Cyclone Gabrielle hit the North Island of New Zealand causing widespread damage estimated to be at least NZD$13.5bn (AUD$12.3bn) (NZ Finance Minister). New Zealand declared…