Cautious approach to investment set to change

Change may be in the air for the commercial property market, after the ultra-cautious start to 2022.

New Zealand’s commercial property market in the first half of 2022 has been marked by a cautiousness not seen since the 2007 credit crunch. That has been evident in the widening of bid-ask spreads and a circa-65 per cent drop in high-value transactions from the last year, according to Bayleys market experts.

However, Bayleys national director commercial and industrial Ryan Johnson says the second half of 2022 should see far more market activity as investors get more visibility over the true impacts of the recent fast and sharp inflationary period.

“We are getting to that point in the economic transition where things are starting to get a bit clearer.

“Towards the end of June, we saw quite a material pull-back in the two-year swap rates,” Johnson says.

“That signals we could be getting near the top end of the interest rate cycle. The cost of debt moved so aggressively over the past two quarters; it could be that the end is not too far away.”

Johnson says the New Zealand market is experiencing the same trends as almost every other developed economy around the world, with the key difference that we are about three months ahead of other key economies, due to the Reserve Bank of New Zealand’s (RBNZ) aggressive approach to moving interest rates back in March.

“Other countries have been watching what happens here, particularly Australia which has been watching to see what happens in both the residential and commercial markets in New Zealand.

“The Reserve Bank of Australia moved their rates in June, and are following the same pattern we experienced – just later,” Johnson says.

A recent report Rising Capital in Uncertain Times; Active Capital Asia-Pacific Perspective for June-July 2022 by Bayleys’ UK-based global real estate partner Knight Frank outlined the key issues for investors as:

-increasing caution and risk aversion as a result of geopolitical and economic uncertainty

-limited stock for investment

-widening bid-ask spreads

-a downturn in activity due to inflation and the cost of debt.

Those key issues are playing out in conjunction with other, related trends such as a flight to quality, high demand for distribution and logistics warehousing, softening yields against higher interest rates, and the ongoing rise of construction costs.

Most of those trends and issues can be found in the New Zealand market with some subtle local differences in the level of impact, Johnson says.

“Bid-ask spreads are particularly large in New Zealand at the moment. That clearly illustrates that vendors and investors have been in different places with very different expectations. That is largely down to the higher refinancing costs and re-rating of asset risks at a sector and sub-sector level.”

With vendors and investors struggling to agree on price, there has been an obvious – and fairly immediate – hand-brake effect on transaction volumes over the past quarter.

“We’ve seen a drop of about 30 percent in transaction volume since mid-March,” Johnson says. Despite that, the total number of listings on Bayleys’ books has remained steady at record high numbers.

“That’s a demonstration of that bid-ask gap because clearly there is plenty of stock available, but vendors aren’t prepared to take what the market is offering.”

Johnson adds that with little transactional evidence to suggest the current market conditions favour vendors over bidders or vice versa, sales are stalled with neither side prepared to move.

A small group of purchasers acquiring on an all-equity basis is having the added impact of keeping commercial cap rates tight, by squeezing out the majority of the market.

“Those all-equity buyers are actually keeping prices higher across the board, but, once their mandates are complete there just isn’t the depth of bidders below.”

As investors recover from the sharp change in market conditions and have more clarity over the impact, they should be more confident about re-engaging, says Johnson.

“Ultimately, the capital has to move. Decisions still have to be made, balance sheets still have to be adjusted or repositioned.

“The December end of the calendar year is coming up, and that will be an important balance date for a lot of corporates,” Johnson says, predicting most activity could be in off-market transactions as vendors test the waters.

- Article supplied by Bayleys