The latest monthly report from the Colliers Research team highlights encouraging developments in the commercial and industrial property investment markets, as recent statistics from MSCI reveal that returns from its ‘all property’ index returned to positive territory for the first time since 2022.
MSCI, a global investment research firm, have analysed data from across the New Zealand market and the figures reflect a transition to more stable conditions following a period of significant volatility driven by changes in monetary policy since early 2020.
According to the new data, average annual returns for ‘all property’ assets have climbed to 1.2 per cent for the year ending March 2024, signalling a notable recovery from the negative territory that has characterised the market over the past year.
Ian Little, Associate Director of Research at Colliers, says the significant fluctuation in investment returns generated over recent years, illustrated by the MSCI figures, have been a direct result of the changes to the Reserve Bank’s (RBNZ) monetary policy as it acted initially to support the economy through the Covid-19 pandemic and then transitioned to fighting the rapid rise in inflation.
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“The report reveals the return on ‘all property’ assets soared to a 17-year high of 20.7 per cent in the year ending September 2022, fuelled by the RBNZ’s historically low Official Cash Rate (OCR) of 0.25 per cent during the height of the Covid-19 pandemic,” Little says.
“However, as the RBNZ pivoted towards combatting rising inflation, its subsequent rate hikes led to a sharp decline in property returns, which fell into negative figures in early 2023 and remained there for over a year.
“The initial drop in returns was primarily driven by shifts in capital values due to rising yields as the RBNZ implemented a series of rate hikes.
"The subsequent year was marked by a recalibration phase where the market adjusted to these higher rates.
"Now, with the OCR having been held steady for over a year, we are beginning to see signs that the recalibration cycle is reaching its conclusion.”
The recent figures show that while capital returns have been on a downward trend, the pace of decline has slowed, with a measured decrease of -4.7 per cent in the year to March 2024 compared to the fall of -7 per cent recorded over the year to March 2023.
This moderation suggests the market is approaching a new equilibrium.
Performance across different property sectors varies, with the retail sector emerging as the strongest performer in the year to March 2024 with a total annual return of 5.2 per cent.
The office sector saw a notable rebound to -0.2 per cent from a previous low of -4.2 per cent in September 2023.
The industrial sector lags the others reflecting that the recalibration of industrial yields began later than in the retail and office sectors, and the industrial sector experienced a greater degree of yield compression in 2020 and 2021.
Little says although the industrial sector has lagged in the short term, it has outperformed other sectors over the longer term and a recovery in returns is expected in the near term, given the sector’s strong investment fundamentals.
“As we move into the second half of 2024, we anticipate a further recovery in investment returns. Recent economic data releases and the latest statement from the RBNZ have led a number of commentators to bring forward their forecasts for an initial cut in the OCR. This supports the view that the recalibration in investment yields is reaching its conclusion.”
- Supplied by Colliers
