Managing risks in commercial property investments
The Financial Markets Authority (FMA) has released research revealing that while most KiwiSaver providers are equipped to manage their exposure to commercial real estate, there is room for improvement in mitigating and communicating the risks.
Commercial real estate, once considered a low-risk option, has faced challenges globally due to rising interest rates and changing usage patterns since the COVID-19 pandemic.
Shifting market conditions
Last year saw growing signs of stress in the commercial real estate sector worldwide, particularly with second-tier office buildings and retail spaces.
By early 2024, transaction volumes had dropped significantly, causing some overseas real estate funds to limit redemptions.
To better understand New Zealand’s situation, FMA investigated KiwiSaver providers' exposure to this market.
FMA’s reassuring findings with caution
After engaging with 10 fund managers, FMA found that most KiwiSaver providers take a conservative approach to commercial real estate investments.
“Most funds appear to have good practices in place to identify and manage the risks associated with commercial real estate,” said FMA chief economist Stuart Johnson (pictured above).
Many managers were even underweight against their own investment targets, indicating cautious investment strategies.
Areas for improvement
Despite these positive findings, FMA, which recently welcomed a new executive director, highlighted some areas for improvement, especially concerning liquidity risks.
Johnson noted that some fund managers rely too heavily on the listed nature of commercial real estate assets to manage liquidity, potentially underestimating the risks in current market conditions.
He stressed the need for firms to be more vigilant, saying, “It’s important that fund managers understand and manage these risks properly.”
Importance of managing risks in property investments
Johnson also acknowledged the long-standing benefits of commercial real estate as a part of diversified portfolios, but cautioned that like any investment, it comes with risks.
FMA’s research serves as a reminder for KiwiSaver providers to continually assess and adapt their strategies to ensure the safety and growth of their clients' investments.
Read the FMA media release and access the Commercial Real Estate and the Managed Funds Industry Research.
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