Opinion | Building Through Uncertainty – The Case for New Zealand Property Development in a Volatile World

Globally capital and appetite for development risk is not scarce, the conviction to execute on good opportunities is.

Across all major global property markets new development activity has reduced due to high interest rates, construction costs, and geopolitical uncertainty that shows no signs of ending anytime soon.

From COVID, to climate events, to the war in Ukraine, to Trump’s latest Operation Epic Fury, these disruptions have had a direct and ongoing effect on the property supply chains, energy markets, and investor sentiment that drive property development. At the time of writing we are in week four of Operation Epic Fury in Iran. My sense is that this will be more than an event or a regional disaster, add to that the ongoing impacts of the pandemic and the current AI growth curve and we are in for a substantive reset of world order and systems. Life for the foreseeable future is likely to be more complex and transactional.

The result of this is a global investor and capital base that has liquidity but is sitting on the sideline, hesitant to execute on new development projects. That hesitancy creates a window of opportunity for NZ.

A crowded investment world, selectively competing over projects and locations

The biggest challenge facing global property investors looking to deploy capital is not a lack of options, it is a lack of options that provide relative safety, liquidity and returns proportionate to risk.

By history, the US has been the default location for investment in uncertain times due to its large and highly liquid markets, however competition for new development and resulting tight margins make the US investment case increasingly difficult to justify.

Australia’s fundamental story works well for property investment, but their saturated capital markets have done the same work as the US, making development project margins tight.

Europe has just gone through a deep property repricing cycle, with assets trading below replacement cost, there is still distress in the market and liquidity issues. Opportunistic institutional investors are making a move to re-enter the market at the bottom of the cycle, but regulation risk, structural and planning complexity and political/social issues can make standing up development projects challenging.

Throughout Asia, the ongoing property correction in China has caused a contagion effect to other Asian countries, hindering the flow of capital into new development projects. While the scale of the opportunity in China has in the past crowded out other Asian opportunities, development funds have become more selective, choosing to develop in safer locations like Singapore and Japan. Political and execution risk issues make development in the emerging Asian markets hard to justify with the required risk premium rarely on offer.

The general pattern across the globe is consistent, property markets are either over competed with low returns, or loaded with risk making development complex and returns uncertain. Neither position is appealing.

We in New Zealand uniquely stand apart from both extremes. We are a smaller, less crowded market, supported by the structural, political and commercial stability that underpins successful development projects.

The case for New Zealand investment

New Zealand does not carry emerging market risk and outside of local tendencies towards property speculation, pressure on development returns has not been affected by a global influx of investment capital. The investment logic for NZ is sound with solid fundamentals:

Housing supply structurally short

Long periods of low construction activity relative to the 30,000 net migrants p.a. we have received over the past two decades has created a structural demand gap that persisted across market cycles. While a recent drop in migration has caused the gap in main centres to reduce, the long term forecasts point to a continued structural shortage of housing.

Demographics support long-term demand

Population growth coupled with a declining number of occupants per household underpins NZ’s long term structural housing demand. The continued trend of urbanisation, concentration of urban activities and increasing acceptance of medium density living keeps pressure on our key investment centres. Our wealthy ageing population supports the investment case for retirement and diverse housing types.

Policy and planning is moving in the right direction

RMA and local planning reform, investment in infrastructure, and council’s support for increased density are all shifting the landscape for developers and investors. The transition has been imperfect and the timing isn’t certain, but the direction is consistent. Consistency gives developers and investors confidence to execute.

A structural opportunity and short term challenges are not however mutually exclusive. In NZ we currently have both.

Feasibility margins are compressed due to low sales values, high construction and land costs, our consenting system remains complex, construction risk is elevated with recent liquidations, and presales are only forthcoming for the right projects.

Structural tailwinds of this nature are however precisely what investors seek when taking a long term bet.

What Opportunity Actually Looks Like

The NZ development projects being underwritten today are not placing speculative bets on market recovery, they are well designed, structured, funded responses to underlying demand.

These projects are set up to perform across a range of scenarios, strong presales or control over the exit risk is secured and feasibilities have been stress tested. Developer’s capital stacks are structured to reflect actual risk, with engagement and alignment between equity, debt, and delivery teams built in from day one.

The influx of flexible, low cost private credit into the property development space has enabled projects that traditionally main banks wouldn’t support. The increasing sophistication of equity investors and willingness to participate in increasingly complex arrangements (even taking last dollar risk when the right sponsor is involved), has allowed experienced developers to move when the less structured developers cannot. This is the natural evolution of a maturing capital market.

The developers and investors delivering in this environment are not doing so by avoiding complexity and risk. They bring complexity and risk forward, understand it, and manage it well enough to move while others wait.

The Entry Point

In a global sense NZ’s development market offers value through genuine scarcity, structurally undersupplied, not yet taken over by the institutions, and navigable only by the developers with the planning knowledge, contractor relationships, and flexible capital to execute. That combination is not widely available globally, therefore it justifies investor attention.

If we want to build through uncertainty, global volatility is not just another risk on our matrix to be managed. It is the state in which the next wave of places people live and work get built, and under which the developers and investors willing to act will earn returns commensurate with the discipline it takes to execute.

The NZ property market is not waiting for certainty, it is waiting for the developers and investors who do not need it!

Corey Penney

Dev. Manager and Financial Analyst

Leading several significant transactions across MPL’s built-form and land-development projects, Corey is responsible for the financial analysis and modelling of the company’s projects.

He is dedicated to finding the right balance of commercial success and design excellence for stakeholders. Corey has years of experience across development management, feasibility and funding, as well as design and project management.

Corey is a Chartered Financial Analyst with a Bachelor of Property and a Bachelor of Business from Auckland University.