Most property stocks continued to recover ground in June but the overall sector return has been held back by concerns about the raising of new equity, Forsyth Barr broker Suzanne Kinnaird says.
Other concerns are the continued uncertainties around property valuations, rental levels and vacancy rates.
Listed property had a 2.9% gross return, outperforming a flat NZX-50 that was up 1.2%.
There were signs investor confidence was improving.
AMP NZ Office Trust was the major exception.
Its unit price continued to digest its large discounted equity issue and it was now trading at a historically high yield and discount to its net tangible asset rating, she said.
"While the property market remains subdued and pressure continues to build on market rents, incentives and vacancy levels, a period of relative stability in markets generally and increasing activity levels in the direct property market has improved confidence towards listed property."
The property market would remain challenging but the listed sector had its gearing and banking relationships under control in most cases and already had substantial negativity priced into shares, Ms Kinnaird said.
"While we believe we have seen the worst in terms of large-scale valuation and cap rate corrections, pressure continues to build on vacancy and rental levels which will mean further but smaller valuation falls."
In that environment, it remained difficult for the sector to have a substantial rally, even with its attractive yields and a substantial further pull-back in property values priced in, she said.
The focus for the New Zealand listed property sector continued to be maintaining balance sheet strength with the sale of smaller properties, keeping up a good relationship with the banker and holding on to tenants at all costs.
The sector and recommendations:
AMP NZ Office Trust - hold
The trust had completed an underwritten nine-for-20 renounceable rights issue at 65c per unit, raising $201 million which has reduced gearing from 32% to sector-low levels of around 20%.
The large size of the issue and level of discount reflected a very cautious outlook by the trust towards the economy and the underlying portfolio performance.
Last traded at 70c, valued at 97c.
Goodman Property Trust - buy
Goodman had been facing negative sentiment given its relatively large land bank and development focus, the weak share price of its Australian parent and the risk around further equity issuance in the property sector.
Forsyth Barr believed Goodman had been oversold.
It had quality properties, its banking was under control, a favourable management fee structure was in place and it had an attractive yield.
Last traded at 91c, valued at $1.
ING Medical Properties Trust - hold
IMP's unique healthcare portfolio remained low risk and provided an element of diversification away from a cyclical downturn in traditional commercial property.
IMP had strong defence qualities given its long-weighted average lease term of nine years - almost twice the sector average - low lease expiry risk and most of its leases structured for annual CPI-based rental increases.
The trust had confirmed its banking facilities and had gearing levels in line with the sector average.
It had sold some small non-core properties.
Last traded at $1.21, valued at $1.18.
ING Property Trust - hold
ING's large, diversified $1.3 billion portfolio of 88 properties and 333 tenants was spread relatively evenly between industrial, office and build retail.
The under-rented portfolio was sound given its spread of assets and 99% occupancy.
Last traded 61c, valued at 73c.
Kermadec Property Fund - hold
KPF had a $130 million diversified portfolio centred on Auckland and spread across eight properties.
Its largest asset was an Auckland CBD car park and podium complex.
While KPF was trading at a large discount to valuation and its asset backing, Forsyth Barr preferred larger and less geared LPVs in the current market. The company had renewed its banking facilities but was starting to see evidence of increasing vacancy and pressure on rents in the Auckland office market.
Last traded 42c, valued at 62c.
Kiwi Income Property Trust - buy
KIP had relatively defensive cash flows and remained one of Forsyth Barr's preferred LPVs with its focus on tightly held prime retail and office assets and its long-term bank facilities.
Sylvia Park had been a successful development and KIP's prime CBD office portfolio was "reasonably sound" given its low vacancy and the modest new supply outlook.
However, general vacancy and rent review risks in the Auckland CBD continued to build.
Last traded at 90c, valued at $1.10.
National Property Trust - hold
The trust continued to sell non-core property to reduce debt and was improving its portfolio.
The management contract had one of the weakest management fee structures in the sector but unit holders had blocked the trust's attempt to change this.
It had significant exposure to retailers, including the two major assets, the Rialto and Eastgate shopping centres.
Last traded at 37c, valued at 57c.
Property for Industry - accumulate
The company had a track record of reliable performance underpinned by a clear strategic direction.
It had been able to leverage its internal land bank and had a redevelopment pipeline of around $30 million worth of projects.
It had sector-low levels of gearing and had renewed its banking facilities. While property valuations remained under pressure, it was already pricing in a significant correction in property values.
Yields remained attractive. Last traded at $1.18, valued at $1.15.
• Ms Kinnaird's disclosure statement is available on request.
