KiwiSaver's swelling coffers have prompted a local fund manager to buy a big Auckland office block from a European owner - and more such deals are being predicted.
Tower Investments chief executive Sam Stubbs said the Tower Property Fund bought the 6279sq m, five-level URS Centre at 13-15 College Hill Rd, in Auckland's city fringe, from a German property syndicate for $23.6 million, making it one of this year's larger deals.
"We've really done this because of a rising tide of KiwiSaver levels. The cash levels have risen to the point where we started buying. KiwiSaver funds are helping people buy back New Zealand in terms of property.
"We're firmly in favour of the property asset class because of the inflation hedge and the yield so we are overweight [in property] and are going to get more overweight," Stubbs said.
"The purchase expresses our high confidence in New Zealand commercial property as an asset class, with attractive current returns and good future prospects, particularly if domestic inflation picks up again," he said.
But it mainly illustrated the bulk of money flowing into assets here from New Zealanders' superannuation savings, Stubbs said.
"The acquisition reflects strong growth in funds under management by Tower and our asset allocation decision to invest more in New Zealand commercial property."
The freehold property has 190 carparks in a two-level basement area. McConnell Dowell built the block in 1989 and New York Stock Exchange-listed global engineering and consultancy firm URS, which spent more than $3 million refurbishing it, pays 54 per cent of the annual rent and 20 per cent comes from the Education Review Office.
Tenants pay about $224/sq m.
The block, returning $1.9 million annually and with floor plates of about 1565sq m, was sold by Ray White Commercial managing director Bruce Whillans of Shortland St.
Stubbs said Tower Property Fund's direct real estate holdings had increased by 9.6 per cent and were now valued at $268 million.
He said the Tower Property Fund, established in 1993, was a wholesale investment vehicle owning major retail centres, office blocks and industrial properties in Auckland, Tauranga, Wellington and Christchurch.
The ungeared fund had delivered a 10-year internal rate of return of more than 10 per cent and Stubbs indicated the cheque book was still open.
"The fund is continuing to seek further investment opportunities in Auckland as part of its strategic growth plans," he said.
Chris Dibble, Colliers International's Auckland research manager, said KiwiSaver fund managers would increasingly turn to property for higher growth and the top 10 growth funds had increased their holdings lately.
"The large sum of KiwiSaver money looking for property as an investment vehicle will play a major role in the rising demand for commercial property this year," Dibble said.
Yet some providers had only a minuscule holding in real estate, preferring the share market and other asset classes.
The Financial Markets Authority's latest KiwiSaver report showed that in the year to last June, six default funds had only about 2.5 per cent in real estate, Dibble said.
The KiwiSaver money pool would grow once the minimum employee and employer contributions rose from 2 per cent to 3 per cent on April 1.
Commercial property investors were already finding good stock hard to come by, he said, citing his firm's latest commercial sales analysis.
Justin Kean, Jones Lang LaSalle research and capital markets director, said the property sector was a little disappointed with the take-up by KiwiSaver providers but funds were small compared with the asset size of a commercial property.
If a fund bought a prime quality office building, for say $50 million, it would suddenly be heavily exposed to that single asset, giving a high level of risk with no liquidity, Kean said.