As 2022 shapes up to be the year that offshore investment returns to New Zealand commercial property, investors prepared to look at a range of debt and capital sources will enjoy opportunities not available to those with a narrower view, say Richard Zhao and Alex Nikolaou, Directors of CBRE New Zealand’s Debt and Structured Finance team.
After two years of suppressed overseas investment, New Zealand’s commercial property market is opening up to the world again. A surge of investment interest is coming as New Zealand’s borders open, and foreign capital is set to make up at least two thirds of acquisition activity this year and next, mirroring 2014 and 2018 levels.
“We have already seen this phenomenon take place overseas, and it has begun to happen here,” says Richard Zhao. “We are already seeing evidence of pent-up demand for investment grade assets in New Zealand, and we expect a significant rebound in office transaction activity in particular this year as more capital looks for a home in our market.”
Zhao refers to CBRE’s latest report on global capital flows, which show a record $77.5 billion in cross- capital flows to the Asia Pacific region, North America and Europe during the second half of 2021, representing a 60% year-over-year jump.
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“Within the total, capital inflows to Asia Pacific totalled $9.6 billion, which was the highest amount in the past decade. This was in direct contrast to H2 2020, during which cross-regional capital flows flatlined, due to market uncertainties caused by COVID-19. With travel restrictions easing and uncertainty starting to decrease, CBRE forecasted that investors from Asia Pacific and North America will likely remain active in other regions, while the recovery of outflows from Europe and the Middle East likely will continue.”
Zhao points to many recent transactions across the Asia Pacific region over recent months including nearly $6 billion of debt facilities arranged by CBRE in Australia and New Zealand, as well as recent announcements by Precinct Properties in New Zealand, to show the ongoing enthusiasm of major offshore players on quality assets in New Zealand’s main markets.
“Globally the system is awash with cash. There has been considerable conservatism over the last few years; a lot of cash has been sitting with large funds and investors, who are now looking for placement opportunities to put it. With New Zealand’s borders now starting to re-open, there are many offshore investors looking at the New Zealand market from an equity and debt perspective, with genuine interest from global wholesale investors.
“Globally, the investment market is now turning to New Zealand and seeing a strong and stable economic and political environment, which makes us attractive as an investment destination; one of few regions with positive GDP over recent years. Australia and New Zealand are among the few countries globally where economic growth has been upgraded in recent months. Improving growth rates can help mitigate the pain from rising rates.
“We are therefore working to connect people with property and capital from a range of sources, helping investors to access debt structured finance and capital, which are going to be exceptionally important for investors looking to progress over the next 12 months.”
Alex Nikolaou adds that alternative capital and debt sources have become a valuable consideration for local investors as New Zealand has ridden a wave of rising commercial and residential property values. The resulting yield compression presents a risk as interest rates rise.
“In the commercial property market, properties that could previously manage large debt loadings may have needed to scale back, which is not always easy. Drivers of this challenge are both foreign and domestic. Continuing global supply chain issues are contributing to rising inflation around the world. Locally, a slowing residential property market, continued COVID-19 restrictions, supply and labour shortages, and rising interest rates, are also pushing volatility across a range of metrics.
“In this inflationary environment, commercial property will look relatively attractive as an asset class due to its proven record as a hedge against inflation. This is due to the fact that over the long-run, market rents largely rise with inflation, with short-term variations from changes in market fundamentals. As a result, this increases capital values in line with inflation over the long term.”
Zhao says that in European, Asian and American markets a significant amount of property lending today involves non-bank sources, which is also creating demand for second finance options here in New Zealand. “On one hand, we have a need here now to examine sources of capital. On the other, after two years of suppressed overseas investment due to our closed borders, we are seeing evidence of pent-up offshore investment demand into New Zealand. Navigating this influx of offshore interest coming into our market can be daunting, but structured finance has been around for a long time, which is where our knowledge, connections to offshore options and ability to help our clients is so valuable.”
So what options are available? CBRE’s Debt and Structured Finance team is helping owners and investors to examine their capital structures and to become aware of the capital that is available to them from non-bank and offshore lenders, which may offer much more competitive options.
“Right now it’s about an information journey,” says Zhao. “One option could be to revisit current capital structures to ensure sufficient debt covenant headroom is in place, or fine-tuning incumbent debt arrangements by either introducing new domestic or offshore lenders, and/or negotiating better terms to help the client steer through the upcoming challenges in the market. Ultimately borrowers should be considering local interest rate risk management now, if they haven’t already, and speaking to someone about options.
“As the world’s number one debt advisory firm, with our local team integrated into our Asia Pacific team, we have access to knowledge and offshore finance parties. Globally, the Debt and Structured Finance team was involved in over $50bn of loan transactions, sourced from over 330 lenders across the globe. Through our network of global offices we can facilitate cross-regional capital debt flows. For example, a client with a sizeable Australasian property portfolio wanted to buy an asset in the UK. Through our network, an hour later we had the client in connection with our London-based Debt and Structured Finance team.
“Here in New Zealand, CBRE’s Debt and Structured Finance team is also working with an offshore lender to provide support for a large multi-stage land subdivision, with a lending amount exceeding $100 million.
“Fortunately, our market here in New Zealand is becoming increasingly sophisticated, willing to adopt new and alternative capital sources. We are broadening the quality of the debt advisory space in New Zealand, resulting in more confidence in this sector and helping clients step up the ladder, which right now requires a different mentality, financial knowledge and strategy, including adopting new lenders and offshore capital flows.
“One thing is certain, to facilitate growth New Zealand will need to expand its funding sources to meet rapidly changing market conditions.”
— Article supplied by CBRE
