pmgfunds.co.nz
ISSUE NO.47 October 2024
Investor update Investment Outlook As we approach the end of the calendar year, I've taken a moment to reflect on the cautious optimism we shared earlier in 2024. At the time, we were navigating an uncertain economic landscape shaped by the high inflation and high-interest rate environment. Despite these hurdles, we believed light was on the horizon, and we are now starting to see positive changes taking shape. This progress is positioning us well for renewed opportunities and growth as we head into 2025. Recently, the Reserve Bank of New Zealand (RBNZ) lowered the Official Cash Rate (OCR) 0.50% to 4.75%, with many market commentators forecasting another 0.50% drop in November on a pathway to around 3.25% towards the end of 2025. These moves reflect the RBNZ’s response to cooling inflation, which has now returned to within its target range of 1-3%, and a desire to stimulate economic growth. As the OCR continues to reduce, we can expect term deposit savers to be affected with reducing returns, with the average deposit rate* for 12 months or more now sitting at 4.69%, leaving a net return of just 3.37% for those in a term PIE. In contrast, PMG’s retail funds have delivered an average gross return of 5.16% and net returns of 4.42% over the past six months (acknowledging the difference in asset class and risk profile). This being said, we know our investors value regular monthly cash returns and growth in value over time. With interest rates expected to decline further into 2025, this return gap may widen, making commercial property an increasingly attractive option for long-term investors seeking regular income. Inflation, once a major concern at the start of the year, has eased from 7% to 2.2%, providing a more stable economic outlook. Whilst households are still managing high costs of living, the downward trend in inflation is encouraging for both the broader economy and the real estate sector. Additionally, with interest rates continuing to decline, we expect we are now around the bottom of the property cycle, with tailwinds for property valuations in the coming years ahead. This points to a more favourable opportunity for investors seeking returns in commercial property, especially as the economic outlook continues to improve.
Looking ahead to 2025, we see it as a pivotal year, with the New Zealand commercial property market transitioning from a period of correction to renewed growth. Having likely reached the bottom of the cycle for most asset classes, now presents a prime opportunity for PMG investors. Lower interest rates are expected to be a key driver of increased fund profitability, the potential for value growth and potentially stronger investor returns.
What this means for PMG and our investors Over the years, our strategic shift from standalone syndications to a funds management model has allowed us to adopt a more diversified approach, strengthening the income resilience of our portfolios. Why? Because a larger portfolio with multiple investments across various geographies, sectors, and property types not only reduces risk but also creates greater opportunities to proactively grow value throughout varying market conditions. As interest rates decline and inflation stabilises, we see growth opportunities in New Zealand’s commercial real estate market for 2025. Our strong portfolio combined with our conservative borrowing strategy and proactive interest rate hedging, has positioned our funds well to capitalise on excellent strategic acquisitions, at good value, whilst continuing to remain focused on delivering sustaining fund performance. Looking ahead, we remain focused on being proactive to maintain high tenant occupancy and continuing to drive rental income growth through our property partner of choice strategy. Our team are well placed to continue using our strengths to proactively manage our assets and ensure we are delivering on value-add initiatives that align with our strategy of growing value over the long term. Thank you for your continued trust and support.
Sincerely, Scott McKenzie, CEO & Director
*Straight line average of the 1 year to 5-year term deposit rates as at September 2024
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