Research from the Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko - has found most KiwiSaver providers are well placed to manage their exposure to the commercial real estate market but more work can be done to mitigate and communicate the risks.
Commercial real estate has become an important alternative asset class for fund managers, and was previously seen as a relatively low-risk investment option within a diversified portfolio.
Last year commercial real estate started to show signs of stress globally - increased interest rates and changes in usage patterns driven by the COVID-19 pandemic, especially around second-tier office buildings and retail investments, were driving down valuations. By the start of 2024, transaction volumes had decreased, causing some overseas real estate funds to limit or suspend redemptions.
In this context, the FMA undertook research to increase our understanding of the exposure of New Zealand KiwiSaver providers to commercial real estate in order to better understand the risks faced by New Zealand investors.
The FMA engaged with 10 fund managers about their commercial real estate investments, including both default and non-default funds and funds of different sizes. Based on the information that fund managers provided, most have good practices in place to identify and manage the risks across their commercial real estate positions.
FMA Chief Economist, Stuart Johnson, said: "What we found in this research was largely reassuring - most New Zealand fund managers have been taking a pretty conservative approach to this sector - in many cases they're underweight against their own targets.
"In most cases the risk to New Zealand investors seems to be recognised and reasonably moderate. Most funds appear to have good practices in place to identify and manage the risks associated with commercial real estate."
The research did, however, find some areas where firms can enhance their risk management practices, said Johnson.
"These include an overreliance on the listed nature of commercial real estate assets for managing liquidity risk. We think some managers might have underestimated the level of liquidity risk associated with both their unlisted and listed commercial real estate assets under the current market conditions. We are also concerned about firms assuming a high degree of liquidity simply because an investment is listed.
"Commercial real estate has long been a positive asset class due to its ability to provide both steady income and growth potential. Over recent decades, it has become an increasingly important part of a well-diversified portfolio. But these investments, like all investments, come with risks," said Johnson.
"We are saying here that it's important that fund managers understand and manage these risks properly."
View Commercial Real Estate and the Managed Funds Industry Research
