Financial Markets Authority finds KiwiSaver providers well-placed for commercial real estate risks but urges stronger risk management

Most KiwiSaver providers are “well placed” to manage their exposure to the commercial real estate market, according to the Financial Markets Authority (FMA), but fund managers still need to work on their risk management.

The FMA has published new research around the exposure New Zealand KiwiSaver providers have to commercial real estate and the risks faced by NZ investors.  

According to the FMA, commercial real estate has become an important alternative asset class for KiwiSaver fund managers after previously being seen as a relatively low-risk investment option within a diversified portfolio.

Commercial real estate started to show global signs of stress last year, driven by increased interest rates and changes in usage patterns from the covid-19 pandemic.

The FMA said by the start of 2024, transaction volumes had decreased, causing some overseas real estate funds to limit or suspend redemptions.

The FMA’s research on the subject was based on discussions it had with 10 unnamed KiwiSaver fund managers earlier this year. 

The FMA told interest.co.nz on Monday it wouldn’t disclose which providers took part in the research due to the commercial sensitivity of the information the fund managers provided.

In the new research, the market watchdog found most KiwiSaver fund managers had good practices in place to recognise and manage risks across their commercial real estate positions.  

The FMA’s Chief Economist Stuart Johnson said the 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,” he said.

Most of the exposure to Commercial Real Estate (CRE) in NZ is through listed real estate funds or real estate investment trusts (REITs), which are publicly traded on the market like stocks.

The FMA’s report found as of December 2023, KiwiSaver funds had allocated around 3.2% of their NZ$100 billion+ portfolio to CRE, of which 2.6% is listed and 0.6% is unlisted. 

“This allocation is relatively low compared to other growth assets and falls below the average target allocation of 3.1% in listed and 1.1% in unlisted. Most managers feel this is appropriate given the current economic conditions,” the report said.

The FMA’s research did find there was 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 condition. We are also concerned about firms assuming a high degree of liquidity simply because an investment is listed,” Johnson said.

“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.”

The FMA noted several areas where it believes some KiwiSaver firms can improve their risk management practices. These areas were: 

• an overreliance on the listed nature of CRE assets for managing liquidity risk; inaccurate and infrequent
• the valuation of CRE positions
• the high exposure to unlisted REITs without a good understanding of their leverage and funding situations
• a lack of clear communication regarding the inclusion of CRE or other asset classes in
• different risk-rated funds

The report noted the FMA hadn’t seen anything that made it particularly concerned that CRE markets were causing any major issues. However, the FMA said the current absence of big risks associated with the managed funds’ and KiwiSavers’ CRE holding shouldn’t be taken as an “entirely positive reflection” of the asset class.

“We are aware that many CRE investments (both internationally and domestically) will need debt refinancing in the next 2-3 years which has the potential to negatively impact the investment value given the situation with debt markets,” the FMA said in the report.