Fund watch

The challenges faced by property investors this year

Financial markets have had a particularly tough time this year. Investors have been worrying about high inflation and rising interest rates, and the prospect that a slowdown in global growth could tip the world’s economies into recession. Investors don’t like uncertainty, and this has resulted in some big falls in markets and is contributing to the ongoing volatility we’re seeing.

No doubt you would have noticed falls in the value of your investments with us, and are wondering why this has come about. Well, investments in property, and funds that invest in property assets – such as the MFL Mutual Fund – have been caught up in this market volatility.

Here are three key reasons why property markets have fallen this year:

Interest rates have risen sharply

Like with residential property, when central banks raise interest rates, the cost of borrowing increases. For most homeowners, this may mean your mortgage payments go up. In the same way, owners of commercial property see their interest costs heading higher too. Ultimately, this can impact on profits – and therefore the share price of a property company.

Global growth is slowing

Central banks raise interest rates to slow down economic growth and, in turn, cool inflation. As growth slows this can lead to falls in consumer and business confidence, as households rein in spending and business owners become less likely to invest in their businesses. More subdued economic activity therefore has the potential to slow property markets, as it means there may be tougher times ahead for tenants.

A slowdown in the residential housing market

The MFL Mutual Fund invests in the shares of New Zealand retirement companies. While these aren’t commercial property companies in the true sense, they are developers with large residential property portfolios. The slowing residential housing market (which is down 12.7% from its peak according to recent REINZ data) has had an impact on the retirement sector this year, as home owners are taking longer to sell their homes to move into a retirement property.

While it’s certainly a challenging environment, there are some signs the outlook for the property market is improving. Following their recent declines, global listed property companies are now more attractively valued. Meanwhile, in New Zealand, where the fund is mainly invested, the listed property sector is in good shape with low vacancy rates, long lease terms and contracted rents which are in large part linked to inflation. And while higher interest rates have increased the costs for property companies, we favour companies that have strong balance sheets and a clear strategy for growing shareholder value.

This article has been prepared by ANZ New Zealand Investments Limited (‘ANZ Investments’) for information purposes only and it should not be treated as financial advice.

MFL Mutual Fund Limited is the issuer and manager of the MFL Mutual Fund. ANZ Investments is not an authorised deposit taking institution (ADI) under Australian law and investments in the scheme aren't deposits in or liabilities of ANZ Bank New Zealand Limited, Australia and New Zealand Banking Group Limited, or their subsidiaries (together 'ANZ Group'). ANZ Group doesn’t stand behind or guarantee ANZ Investments. Investments in the scheme are subject to investment risk, including possible delays in repayment, and loss of income and principal invested. ANZ Group won’t be liable to you for the capital value or performance of your investment.

Past performance does not indicate future performance, and performance can be negative as well as positive. This material is for information purposes only. We recommend seeking financial advice about your situation and goals before getting a financial product.

Investment and administration manager: ANZ New Zealand Investments Limited.