Although many New Zealanders are sensitive about overseas capital, investors from around the world have shown growing interest in New Zealand in recent years.
“New Zealand's strongly growing economy provides an attractive environment for foreign direct investment,” noted a KPMG report released late last year. Based on Overseas Investment Office (OIO) approvals from 2013 to 2015, the United States and Canada were New Zealand's leading sources of foreign direct investment over those three years, followed by Australia, China and Singapore.
Active overseas investment is also an important sign of New Zealand's growing global connections. Given New Zealand's relatively small capital base, an NZIER report noted that the country was expected to need up to NZ$200,000,000,000 in additional investment to support the Government's export, economic growth and research and development targets.
New Zealand's political, economic and institutional strengths underpin the successful operation of its foreign direct investment framework.
Stable conditions
Property Council chief executive Connal Townsend identified several features of New Zealand that attract overseas investors to commercial property. The economy is highly transparent, corruption is relatively rare, and terrorism is not a topic of discussion here. These factors may have little direct effect on investment returns, but they have helped establish New Zealand's reputation as an attractive investment destination.
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Politically, two stable parties have governed over the past twenty years, with no major departures in policy. The economy has continued to run smoothly, and the Government's finances remain in surplus. This is a rare achievement in a turbulent international environment. By contrast, some other countries, including the United Kingdom, have had to adopt austerity policies.
In Connal Townsend's view, political stability is, overall, the key consideration for office property investors. Although retail has softened nationwide, this is a global trend. Industrial property deserves particular attention, as it continues to perform well, especially when its returns are compared with those from shares and bonds.
High investment returns
The IPD results released by MSCI at mid-year showed that, although New Zealand continued to stand out for commercial property investment, it was also experiencing a period of steady performance in line with global trends.
Bryan Reid, vice-president of MSCI's global research team, noted signs of a downturn in global markets, reflected in shrinking income returns and falling yields. Comparing markets, Reid considered New Zealand's yields still relatively attractive. New Zealand's net operating yield exceeded 6%, well above the 4% to 4.5% levels in Japan, the United States, the United Kingdom and Canada.
Investor enthusiasm remains high. A JLL research report indicated that global commercial property investment activity would remain strong in 2017 and was expected to rebound despite an uncertain global economic outlook. Global property investment was forecast to recover to around US$700,000,000,000 in 2017, up from US$650,000,000,000 in 2016, returning to the record highs of 2014 and 2015.
How large a share of global property investment can New Zealand attract? According to CBRE data, overseas investors invested NZ$394,000,000 in New Zealand's property market in the first half of 2017. These active overseas investors came mainly from Australia, China, Singapore and the United States. Industrial and retail properties were of particular interest to them.
The report forecast that, as investment between regions grew, cross-border property investment could account for more than 50% of total global property investment by 2020.