Timing the Turn: New Zealand’s Real Estate Remains Attractive for Private Credit

This week, the RBNZ maintained its official cash rate at 5.5% but adopted a less hawkish stance, indicating to markets that potential rate cuts may be sooner than anticipated due to declining economic activity and easing inflation pressures. This dovish tone caused the New Zealand dollar and bond yields to slump, with markets now fully pricing in at least two rate cuts this year, potentially starting as early as August. Below are our insights from time on the ground:

• GDP has declined for five of the past seven quarters, with retreating service and manufacturing sectors and decreased business confidence. However, building costs have started to decrease. House-building costs fell 1.1% in the June quarter, marking the first decline in 12 years due to eased supply chain disruptions and weaker demand from high interest rates. Annual growth of 0.6% was the weakest result since the series began in 2012 (CoreLogic).
• Opportunistic buyers in commercial real estate are driving our loan repayments from credit deployed over the past 1-3 years. We’ve seen over $125 million in property transactions or refinancing activity across our portfolio of 13 loans in the past month and expect a further $150 million over the next quarter.
• Our investment thesis that NZ would cut rates before Australia and have real estate demand driven by similar migration themes has supported the recycling of investor capital. Over the past 2 years, we increased the Merricks Capital Partners Fund NZ weighting to 35% due to the significant opportunities for higher-earning senior secured credit (11-13% net IRR) in a less competitive credit market.
• The mixed-use development at 51 Albert Street, Auckland, comprising the 225-room, 4.5-star Hotel Indigo, 30 high-end residential apartments, and two ground-floor retail tenancies, is now over 95% complete. Of the 30 apartments, 26 have been sold, with $46m in net proceeds expected in August 2024.
• We expect macro volatility to continue to be a feature of 2024 but hold high conviction based on the activity we’re seeing at a borrower asset level that private credit secured against real assets will outperform other investments. Ultimately, we’re funding assets where borrowers enhance the underlying asset value through projects and at the safest part of the capital structure to generate investor returns.

Based on our strategic credit deployment approach and risk management, we expect our experience in the NZ market to continue presenting compelling opportunities and effectively bring capital back. As NZ loans repay in 2H24, the Fund’s NZ allocation will reduce from 35% unless redeployed into new opportunities at the bottom of the economic cycle.