Provincia Weekly: 14 May 2021

The New Zealand economy is in good shape with things looking up across the board. Construction, unemployment, confidence, NZ’s fiscal position…

The New Zealand economy is in good shape. On the building side, residential construction is going from strength to strength with the number of new dwellings consented hitting an all time high of 41,028 in the 12 months to the end of March, according to Stats NZ.

Last week’s NZ Household Labour Force Survey data release reported a strong result. Unemployment in Q1 2021 fell from 4.9% to 4.7% (lower than both the Reserve Bank’s and market expectations), and employment growth of 0.6% was stronger than expected.

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Last week’s ANZ New Zealand Business Outlook survey for May 2021 showed a 9 point jump to +7% in business confidence and a 10-point leap to +32.3% in firms’ own activity expectations. All the sub-components also showed solid lifts: export, investment and employment intentions, capacity utilisation, and profit expectations. Pricing expectations hit yet another record high, and cost expectations are off the charts. Inflation expectations lifted from 2.0% to 2.2%.

Of greater importance, says Tony Alexander, is a rise in employment intentions to +22% from +16%. This is well above the 4% average and the highest reading since mid-2017.

And yesterday Westpac’s NZ Budget Preview opined that Budget 2021 will show a dramatic improvement in New Zealand’s fiscal position compared to the Half-Year Update. “Essentially, the Covid hit to the Government’s books has been significantly less than anyone feared and particularly so for the Treasury. Tax revenue and the operating balance tracks will show large upward revisions, and with a sharply lower debt track Treasury will pare back bond issuance plans.

Results from the 1Q 2021 Colliers investor confidence survey showed the industrial property sector to have registered a net positive (optimists minus pessimists) score of 76%. This confidence has translated into heightened competition for assets driving yield compression with average prime yields tightening from 4.5% to 4.1% over the six months to March.

CBRE Research New Zealand reports that despite the increase in bond rates, high levels of liquidity and still good margins between yields and interest rates led to property cap rates experiencing firming across all major sectors into 2021.

In office, CBRE is of the view that most investors are looking through the increase in vacancies, driven by a belief that any weakness will prove temporary.

In retail, CBRE says the general consensus is that the operating environment is improving, supported by positive Christmas trading in December and a reactivated leasing market since then. As has been the case in the past couple of quarters, large format retail centres are the best performing sub-sector underpinned by strong sales growth in furniture, electronics and building materials.

Continuing last years’ trend, CBRE reports that investor demand for industrial assets remained very strong in Q1 2021 with cap rates on average firming an additional 10bps, resulting in an almost 1% compression in the past year in both quality (Prime and Secondary) sub-markets.

Looking at cap rate trends over time, CBRE’s data shows the divergent fortunes of the main asset classes with Prime industrial firming by 213 basis points during the past five years, Premium office firming by 116 basis points, and major Regional Centres easing by 6 basis points.

Industrial yields are now 180 basis points below retail and 60 basis points below office, according to CBRE.

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Retail spending rose by 4% in April, which was stronger than the 1.5% gain expected by Westpac senior economist Satish Ranchhod.

April’s increase in spending was exaggerated by the easing of Covid restrictions which had dampened spending in both February and March, says Ranchod. Consistent with that dialling back of the alert level, much of April’s rise was related to increased spending on hospitality. However, gains were seen in most categories, including groceries, apparel and household durables.

There has been an interesting change in the composition of spending, according to Westpac. Since the outbreak of Covid and the related closure of the border, spending on durable items like household furnishings has been strong. That’s helped to offset the drag from reduced spending in the hospitality sector.

Second, while overall spending levels have been resilient, the underlying trend in spending is now flat (in contrast, prior to the outbreak, spending levels had been gradually rising over time). A key reason for this flattening off is that population growth is now much lower than prior to the outbreak, with New Zealand’s borders closed to new migrants. That will change over time, as vaccine rollouts become more widespread globally and travel restrictions are eased. However, we doubt that population growth will return to the rapid pace that we saw prior to the outbreak, especially as the Government is now looking at tightening migration settings. That will be a drag on spending growth over the coming years.

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