Although commercial property yields have eased in the first half of 2022, driven by interest rate increases, commercial real estate services and investment firm CBRE New Zealand views this downward pricing pressure as transient and likely to ease in 2023.

This could create opportunities for investors with lower reliance on debt who see the current market as an opening.

CBRE NZ’s latest assessment of market trends shows:

-A generally increasing pace of interest rate-driven easing in commercial property yields since the start of the year.

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Following a 10 basis point increase in market yields in Q1, in Q2 CBRE recorded a 27 basis point increase.

-Material differences have emerged at the sector and submarket levels.

These differences reflect the absolute level of yields and thus their sensitivity to higher interest rates, investor sentiment towards the various sectors, and underlying supply-demand differentials and their impact on occupancy and rent growth.

-Yields remain resilient in parts of the retail sector.

Prime shopping centres, which have been a relatively higher-yielding asset class, and which are also supported by strong customer catchments and short-term rental growth potential, are the only sector to avoid increasing yields this year.

CBRE adjusted down market yields for the major regional shopping centre category by 19 basis points.

-Prime office and industrial, although well supported by occupier demand and rental growth, are proving to be more vulnerable to higher interest rates than previously expected given the magnitude of interest rate rises relative to their low yields.

CBRE’s assessment shows that industrial rental growth in particular has been very strong in recent quarters.

Prime industrial rents increased by more than 10% in the first half of the year with Secondary industrial rent growth not far behind at 8.8%.

Despite this strong growth, Prime industrial market yields increased by 27 basis points this year.

- Investors are prioritising income growth and certainty -focused investment strategies.

With investment liquidity concentrated on property sectors and submarkets that can deliver these attributes, they will remain more resilient from a pricing perspective, with the flipside of higher discounting in sectors and assets that can’t fulfil these requirements.

This is reflected in indicative market yields increasing by up to 100 basis points in secondary office submarkets influenced by higher vacancies, low occupier demand and lack of rental growth.

Looking into 2023, CBRE believes that the downward pricing pressure from interest rates is transient.

Zoltan Moricz, executive director of research for CBRE New Zealand, says: “While inflation’s impact on property returns is influenced by its balance with GDP growth and supply-demand fundamentals, past cycles indicate a negative relationship between inflation and returns via the link between inflation and interest rates.

"The impact of these cyclical relationships has become increasingly evident in recent months. However, the inflationary hedge nature of

property is also starting to come into play with higher construction costs and CPI based lease and rent review mechanism contributing to higher rents in some parts of the market.

“The OCR is forecast to peak in mid- to late-2023, with up to 150 basis points of further increase expected but swap and bond rates are likely to peak in late 2022, 25-50 basis points above current rates.

"This interest rate outlook indicates only modest further upward pressure on fixed rate debt, with these likely to start easing during 2023, barring adverse moves for lending margins.

“In this environment liquidity may start improving from investors with lower reliance on debt who see the current market as an opening. The current supply-demand outlook generally provides a positive platform for future income growth, except for Secondary CBD office, where CBRE forecasts an extended period of vacancy and rental pressure.

“The rapidly evolving economic environment and its expected negative impact on the property market will also have an increasing bearing in the next few quarters on the risk and return equation and investor sentiment.”

- Article supplied by CBRE


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