Until recently, residential property investment in New Zealand was the main way to gain exposure to real estate because it was, well, as ‘safe as houses’ and enabled by the banking system and tax framework.
However, increasing compliance in the residential sector and changes to bright-line tests and tax deductibility are decreasing the attractiveness of residential property investment. The bullseye placed on residential property has some investors thinking twice about how they seek exposure to property more widely, which is still an asset class with positive long-term features.
While residential property, commercial office, and retail segments of the real estate market may now seem too risky due to COVID-19 and the changing legal and tax frameworks, industrial property emerges as a potential means of wealth creation and protection positively impacted by COVID-19 and wider macro-economic trends. Could industrial property be the calm within the storm?
A key problem with industrial property investment is its inaccessibility. The price of an industrial warehouse starts at a few million to tens of millions of dollars, quality buildings are scarce, and owning one building concentrates risk. A diversified fund is key, and opportunities such as FortHill Property’s wholesale fund can provide stability and growth of investment for those seeking to hedge their net worth against inflation.
FortHill Property is a wholesale industrial property investment fund offering a unique portfolio of premium industrial properties across New Zealand. FortHill’s team of acquisition managers strategically select properties to meet selective criteria enabling them to deliver strong returns during volatile economic periods such as COVID-19.
The properties in FortHill’s fund are strategically located across the country in main centres and areas close to key freight and transport lines. Currently, FortHill has 22 buildings in the portfolio of varying size, scale, value, and tenancy.
Since the company’s inception in 2019, FortHill Property has delivered an unbroken chain of quarterly dividends and the fund has delivered double-digit annual returns. Even with a global pandemic hitting during the company’s first year in the market, FortHill Property has grown its fund value at a rate exceeding its own expectations.
Initial goals were to create a portfolio valued between $300 million and $500 million in five years, however, in the third year the total property value sits at over $560 million, thanks to four equity raises and selective property acquisitions.
So where do you go from half a billion dollars? You go to a billion and you do this by continuing to build a portfolio of high quality industrial property. FortHill are thoughtful about population growth, particularly in the ‘Golden Triangle’ and look at the macroeconomics and growth pressures in area-specific places. FortHill Property has the opportunity to turn into a $1.0b fund and with that scale comes a significant step change in opportunity.
Nick Maier
FortHill attributes their success partly to the type of tenant they seek. The COVID-19 pandemic, subsequent lockdowns, and the unstable global economy reinforce the move towards e-commerce and a greater requirement for warehouses and logistics centres. Combine this with onshoring and supply chain issues, and in a short space of time there is additional demand for warehouse space. New Zealand Post’s annual review of national e-commerce trends states online shopping was up 25% in 2020, and the country is following international trends of increasing online purchases.
COVID-19 is an accelerator for macro trends already in place. Change is already happening. There's a swing from globalisation to more onshoring. Supply chains have moved from big and narrow, exposed to risks overseas, to more resilient by holding more buffer stock in New Zealand. We’re sitting squarely in the middle of this change.
New Zealand’s lockdowns saw many industrial companies boom, particularly those in essential services utilising warehouse spaces. These companies are useful when investing and protecting wealth.
Many of FortHill's tenants are involved in the goods and services we need in our economy, day in and out. They may not be sexy, but we need industrial space to make the economy go. A big piece of the economy is around construction, supply, services, and logistics, and all that happens with industrial property.
Vacant warehouses are few and far between across New Zealand. Industrial properties have been running at about 1% to 2% vacancy for the past eight years in the key South Auckland industrial market, according to research by Colliers, and often vacant properties are no longer in their prime. Modern warehouses are bigger, taller, and more efficient than older builds. This is where a relationship with Calder Stewart gives FortHill Property a unique advantage to acquire new, tenanted buildings.
Established by Calder Stewart, FortHill Property can work directly with Calder Stewart’s development team to obtain new industrial properties. Calder Stewart is an industrial property and construction company with over 65 years of history in the sector, out of which the growth of an industrial fund just made sense. FortHill remains independently governed while having the benefit of the first look at Calder Stewart’s industrial builds. When FortHill Property was established we were very aware of both the benefits of an off-market pipeline from Calder Stewart and the perceived conflicts, so FortHill was set up as an independent business with the right governance structure and processes.
FortHill Property is intent on building an enduring portfolio with a long-term view. The company’s Acquisition Manager, Ben Stewart, says FortHill isn’t growing for the sake of size, but to provide cash flow growth and long-term returns to investors. FortHill is managing the portfolio of buildings by purchasing new, durable, and secure industrial properties.
Ben Stewart
“Logistics has moved from a just-in-time model to a just-in-case model. The international shipping and COVID-19 risks have increased the need for extra warehousing. This adds to what FortHill does.”
Stewart is a third-generation family member of the Calder Stewart business, working with other family members of second and third generations. His grandfather, Bruce Stewart, founded the business in Milton, Otago in 1955. The family-owned company has evolved significantly from its small rural farm beginnings to being one of New Zealand’s largest industrial property and construction businesses. While Calder Stewart is well known, FortHill has flown largely under the radar. However, after building up a track record and reaching a half-billion dollar value milestone, Stewart says “we’re no longer selling a secret.”
The secret comes back to the properties and tenants. The weighted average lease term for FortHill’s properties is 12 years, which is a long tenure from a risk and stability of contracted income point of view and speaks to the fund’s stability, security, and reliability. The tenants are a mix of national and international brands, and leases include rental income growth.
The acquired properties are also brand new or near new, “and with this comes sustainability – rainwater harvesting, LED lighting, electric car charging. Sustainability is important for Calder Stewart and FortHill,” says Stewart.
One of FortHill’s and Calder Stewart’s initiatives is the rollout of roof solar systems on the buildings. This provides certainty of electricity cost for tenants and future-proofs the buildings. Because FortHill can work with Calder Stewart, the steel structure of the building is strengthened at the time of construction which enables large solar systems to be placed on the roof. “This is beneficial for investor return, tenant electricity consumption, and meeting sustainability targets,” confirms Stewart.
So why invest now amidst all the macroeconomic uncertainty? FortHill invests in up and down markets. FortHill purchased buildings during COVID-19, and are not deterred when they find the right assets for the portfolio.
The alternative is not being invested at all. The value of cash erodes with high inflation, but value can be held by real assets over time. By being invested you have exposure to cash flow and growth over time and can be protected against the negative impacts of inflation. From an investor point of view, assets including property typically have the ability to keep up with inflation. They continue to have usefulness in the future.
FortHill is very thoughtful in terms of leases - who the tenants are and who their customers are. They are the ones ultimately paying the rent.
FortHill has a strong relationship with current investors in the fund, and each fundraise to date has seen about 50% raised from existing investors reinvesting. Stewart says FortHill is talking with wholesale investors who are interested in long lease tenants, stability, potential for growth over time, and those interested in the “opportunity presented by the fund. That's the audience we want to address. We’re looking for like-minded, long-term investors who want to participate in ownership of high-quality industrial property.”
FortHill is now taking expressions of interest from wholesale investors for an upcoming fundraise. The aim is to purchase two properties in Auckland’s Drury South, occupied by logistics tenants in 34,000 square metres of space. One of the ways they’re seeking to safeguard the fund from economic instability is to give FortHill a conservative gearing for the changeable years ahead.
Nick Maier is the General Manager of FortHill Property.
FortHill Property is one of New Zealand’s leading industrial investment funds. Their team has a depth of industrial expertise, backed by Calder Stewart’s 65+ years of construction capability. FortHill Property offers wholesale investors access to premium industrial properties targeting stable returns and growth over time.
Investment in FortHill Property is only available to wholesale investors as defined in the Financial Markets Conduct Act 2013.
