New Zealand yield stocks are back in vogue after the Reserve Bank cut its Official Cash Rate by 50 basis points on Wednesday. Photo / NZME
New Zealand yield stocks can be expected to come to the fore now the Reserve Bank has cut the Official Cash Rate to 2.5%.
Local property shares were the best performing listed real estate globally last month and in the September quarter, with the S&P/NZX All Real Estate Investment Trust (REIT) Index up 6% in the month and up 14.9% in the quarter.
In comparison, the global REIT index was up 1.1% last month and 4.4% in the September quarter. The S&P/NZX50 was up 2.8% in the month and up 5.5% in the quarter.
Harbour Asset Management portfolio manager Shane Solly expects to see more of the same if interest rates continue their downward trajectory.
Market expectations are for a cut of 25 basis points (bps) on November 26, with an outside chance of another 50bps reduction at that time.
Of the listed property stocks, some have a trust structure while others operate as companies.
They own physical commercial real estate and their profitability is determined, predominantly, by rentals.
Interest rates are typically their biggest cost.
“They tend to have higher levels of debt than other assets, so they’re quite sensitive to interest rates,” Solly said.
Interest rate falls come at a time when there is higher earning certainty coming from rental collection.
Solly said the sector could potentially benefit from a stabilising economy and lower short-term interest rates.
“I’m not saying it’s growing, but it’s stabilising, and then these cuts in interest rates fall straight through to the bottom line,” Solly said.
“They do boost the earnings and the ability of the sector to pay dividend income.”
The property companies tend to be slightly higher dividend payers.
“So, if you’re an income-focused investor, this is an asset class that is quite a handy way to boost your income, relative to bank term deposits,” he said.
“This 50-basis-point cut will see support from income-focused investors.”
The market has already come a long way.
“There was a point where real estate shares were trading at a 20%-plus discount to the value of the assets, but now we are back to about a 5% discount to the asset value, so the gap has closed,” Solly said.
“The economy is showing signs of life, and then we’ve got this boost from lower interest rates, so certainly the asset class has done well.
“And based on that yield element, it may continue to do okay but we wouldn’t be surprised to see some of the property companies be a bit more active to the point where some of them raise new capital to grow again.”
Harbour said in a report the August reporting season, which showed signs of earnings improvement, drove NZ REIT returns over the quarter.
“Strength in office owner Precinct Property, Vital Healthcare Property and industrial real estate owner Goodman Property led NZ REITs up over the month.
“Strength in retail mall-focused Kiwi Property, Goodman Property and Precinct Property led NZ REITs up over the quarter.”
Investment and advisory group Jarden, in its monthly property report, said the sector continues to trade up.
“We see limited value gaps across the sector now but acknowledge low term deposit rates on rollover could still spur further buying in the sector,” Jarden said.
Forsyth Barr said cyclicals “dominated the podium” for the September 2025 quarter, with average returns across the sector of 11.2%.
“The market is clearly placing weight on a recovery in New Zealand being close, assisted by further interest rate cuts and signs of – albeit small – green shoots,” it said.
“Overall, the New Zealand market continues to show positive momentum and is now trading close to all-time highs.”
However, this is putting pressure on valuation metrics, particularly within the cyclical sector.
“We are not alone, with global P/Es [price-to-earnings ratios] also at five-year highs (excluding Covid),” it said.
“That said, forecast three-year annualised EPS [earnings per share] growth remains solid.”
Craigs Investment Partners has maintained its “underweight” rating on The Warehouse after its result earlier this month.
The Warehouse delivered a weak 2025 result, with earnings before interest and tax (ebit) of $1.3 million, down 96% on the $28.9m ebit in the previous comparable period, albeit in line with its July guidance of being between a $5m loss and a $5m profit.
“While sales run-rates are showing signs of stabilising, we expect trading conditions will stay challenging through the key Black Friday/Christmas trading period,” Craigs said.
“Furthermore, we remain underwhelmed with the group’s inability to take cost out of the business, and see execution risk as high as the strategic turnaround takes place.
“Notwithstanding a potential takeover, which presents some upside risk, The Warehouse trades on a 2027 price earnings ratio of 11 times (above its long-term average), and at a 12% premium to our revised target price.”
Craigs has a 12-month target price of 71c on the company. Shares in The Warehouse opened at 77.5c on Thursday.
Respiratory products maker Fisher and Paykel Healthcare (FPH) has had a solid run since Craigs head of research Stephen Ridgewell upgraded his recommendation to “overweight” in early August.
That upgrade was largely on the back of its robust medium-term secular growth profile and a deeper dive into anaesthesia.
However, Ridgewell has signalled a choppy six to 12 months lies ahead for FPH with heightened uncertainty after the US Department of Commerce announced on September 26 it was investigating medical device imports under Section 232 of the Trade Expansion Act.
This investigation will take about six months and is likely to result in tariffs on medical devices, which will impact FPH earnings per share from 2027.
Ridgewell said FPH was relatively exposed to tariffs under a Section 232 order.
The tariff situation remained a “moving feast” with a wide range of outcomes possible and considerable uncertainty.
“With the uncertainty not going away for at least six months until there is clarity on the ‘Section 232’ situation and with FPH shares having traded back to the upper end of its premium to peers, we expect FPH will range-trade in the short term,” he said.
Ridgewell said the bullish long-term story for FPH remained intact but the stock looked set to struggle to outperform over the next six months while the rest of the market was in “melt-up” territory.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.