CBRE New Zealand has released a comprehensive report detailing the current trends and future projections for capitalisation (cap) rates in the New Zealand commercial real estate market.
The report highlights significant shifts in market dynamics including a closing of the opportunistic buying window, a strong correlation between swap rates and cap rates during cyclical downturns, and a projected firming of prime cap rates by 30 basis points over the next six months, with an additional 40 basis points expected by the end of 2026.
These findings suggest a more competitive market environment, with nuanced impacts on individual assets and portfolios.
The market is currently experiencing falling interest rates and weaker rental growth. This is expected to continue in the next year or so. How this trend will influence cap rate movements is a key question for cap rate forecasting.
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One of the critical insights from the report is the varied influence of swap and bond rates on property cap rates, says Zoltan Moricz, Head of Research for CBRE New Zealand.
"Ten-year bond rates have the closest long-term relationship to cap rates across cycles. However, when examining the last two cyclical turning points, it becomes evident that swap rates exhibit a stronger relationship with cap rates during these times."
John Holmes, CBRE Senior Director of Capital Markets, says the influence of swap rates aligns with how investors price assets during cyclical downturns.
"Shorter-term cash flow and therefore short-term funding costs become a key pricing driver for investors during downturns."
The report forecasts a firming of prime cap rates. CBRE s analysis indicates cap rates responded to changes in interest rates with a delay of two quarters in the last three major cyclical turning points.
It also shows that compared to the historical average, cap rates are less sensitive to interest rates during a cyclical turning point. This means that a given rate of interest rate movement produces a lesser movement in cap rates at these points in the cycle.
"Our research suggests a 30-basis point firming in prime cap rates over the next six months, in response to the approximately 110-basis point fall in two year swap rates, with a further 40 basis points of cap rate firming implied through to the end of 2026. This aligns with how we are observing market sentiment," Holmes says.
A further important consideration for the market is how the firming in market cap rates during 2025 and 2026 may flow through to actual portfolios, says McGregor.
"Noting that our market-derived yield series has seen more softening than portfolio valuation cap rates in some cases, how the firming plays out for individual assets or portfolios is more nuanced."
"While market cap rates may firm by the forecast 70-odd basis points to the end of 2026, the magnitude and timing of valuation-based cap rate improvements could be quite different," Moricz adds.
Implications for investors
These findings have significant implications for investors in the New Zealand commercial real estate market. The closing of the opportunistic buying window suggests a shift towards a more stable and possibly competitive market environment.
Investors will need to consider the relationship between swap rates, rent growth and cap rates to make informed decisions.
CBRE's analysis provides a deeper understanding of market dynamics, helping investors navigate the complexities of the current market.
The projected firming of prime cap rates indicates a potential increase in property values, which could impact investment strategies. However, the nuances of individual asset and portfolio valuations indicate that property values will not improve universally across the market.
The strongest value uplift will be for properties where current valuations reflect the full extent to which the market softened in the past three years.
In cases where current book values remain above market, the benefits of the improving market cap rates will take longer to flow through.
- Supplied by CBRE
