Colliers has released its September Research Report, revealing a significant deceleration in development activity across New Zealand.
Chris Dibble, Director of Strategic Advisory at Colliers, and Ian Little, Associate Director of Research at Colliers, commented on the findings of the report, shedding light on the challenges faced by developers in the current economic climate.
"Following an extended period of elevated development activity across New Zealand, a number of mounting challenges have resulted in a marked slowdown over recent months,” Dibble says.
“A combination of factors such as higher interest rates, a more stringent lending environment, elevated build costs, and a cooling economic backdrop have increased the difficulty of achieving development feasibility.”
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Little attributes the deceleration in activity to a range of factors, with the most prominent being the amplified cost of financing, and reduced access to funding.
“Interest rates have surged at an unprecedented pace as the Reserve Bank seeks to curb inflation, making it harder for developers to secure funds for their projects,” Little says.
One of the critical factors contributing to the slowdown is the substantial escalation of construction costs, driven by escalating material expenses, disruptions in supply chains, and a shortage of skilled labour. The cooling economic climate is also rendering an increasing number of businesses sensitive to rising rental costs, compelling developers to re-evaluate the feasibility of their projects.
The Research Report indicates a significant loss of development activity momentum within the residential apartment and industrial sectors. Building consent data reveals a decline in ready mix concrete production, underscoring the sluggishness in the construction sector.
"While the current slowdown poses challenges, a more profound shift might await New Zealand's real estate landscape in the future. The lack of building now could lead to availability constraints when conditions improve, repeating challenges of the past,” Dibble says.
"A sharp rebound in migration is bolstering demand for housing just as development slows, mirroring the situation post the Global Financial Crisis. Avoiding a repeat of this scenario will require collaboration between policymakers, developers, and investors.”
Demand for industrial premises remains strong, particularly from an expanding logistics sector, but developers are encountering mounting challenges in rendering projects financially viable.
"Feasibility for large-scale office projects remains a challenge given the economic backdrop and evolving work practices. However, the demand for high-quality, environmentally sustainable premises in prime locations endures, exemplified by continuing low vacancy for high-end premises,” Dibble says.
Little concludes that while the prevailing slowdown has some way to run yet, a return to an increased level of development will clearly occur in the future.
"The combination of enduring demand, an easing of current constraints, and the increased adoption of innovative technology will lay the foundations for the cycle to shift once again, leading to a renewed upswing in development activity."
- Article supplied by Colliers
