Unsatisfied capital unable to buy NZ commercial properties
$ billions of ‘unsatisfied’ capital unable to buy NZ commercial properties since 2017: research
| 9 October 2019
- NZ is an attractive investment destination, but liquidity is being held back by lack of stock for sale -
CBRE’s newly-published New Zealand Market Liquidityresearch report reveals that over the 30 months to mid-2019 the company received nearly $6.9 billion of ‘under-bid activity’ across 20 on-market sale campaigns.
The larger scale transactions conducted by CBRE from 2017 to mid-2019 attracted $8.2 billion in bids for property valued at $1.3 billion., equating to bid volumes 6.3 times the value of the assets offered.
According to Brent McGregor, Executive Chairman of CBRE NZ, “there is a significant mismatch between capital demand and available deals. Our challenge is to marry up the capital with the assets that are available working closely with those owners who are now prepared to sell.”
Key findings from the research include:
New Zealand has received significant investor interest in recent years. In the $5+million space in NZ’s main centres, 231 transactions in 2018 resulted in a record $5.1 billion in sales, and sales volumes have been consistently above $4 billion per annum since 2014.
Domestic investors remain the single largest source of demand, although international investors are drawn to New Zealand. International investment has remained at elevated levels since the 2014 entrance of two pension funds - GIC from Singapore and PSP from Canada. Since then, other large global institutional investors, such as US-based Blackstone Group and Invesco, have made multi-asset acquisitions in New Zealand, in addition to single asset transactions by a wide spectrum of other offshore private and institutional parties.
New Zealand’s market has grown at almost double the average rate for developed countries, and has maintained growth in line with Australia and Singapore over the past 20 years – even slightly ahead of these countries in the past three years.
NZ’s office sector overtook Singapore and the USA for liquidity in 2018. The office sector offers the greatest depth of liquidity in New Zealand - with $20 billion in transactions since 2000, or 40% of activity, the office market has considerably larger transaction volumes than any other asset type.
Deals are increasing in size. Pre-GFC, from 2004 to 2007, average annual transaction volumes were $2.9 billion, with a similar number of transactions to those in recent years. Average transaction sizes have increased materially, from $14.9 million during 2004-2007 to $23.0 million during 2014-2018, mostly highlighting the capital value growth in recent years.
Wellington is as liquid as Auckland. Overseas investors have long considered Auckland Prime office assets as the most desirable entry point to the New Zealand market, which is consistent with the demonstrated levels of liquidity. Wellington has recently seen an increasing proportion of investors entering the market as they recognise the yield benefits the city can offer in what is a stable market with strong occupier demand fundamentals.To an extent the transactions which give evidence to the liquidity levels in Wellington vis a vis Auckland reflects the higher number of active sellers in this market.
Zoltan Moricz, Senior Director of Research for CBRE New Zealand, says that the supply-side constraint on investment is a global occurrence and not unique to New Zealand.
“The estimated level of global private equity ‘dry powder’, or capital which is seeking to be deployed, was US$294 billion in 2018. This weight of capital continues to support an increased level of competition on assets, driving prices upward and creating a compounding effect on capital which is waiting for opportunities.
“While New Zealand is a relatively small property market, it has grown - and continues to grow - more rapidly than most other developed countries. The fundamental local drivers of population and economic growth support the rapid growth of New Zealand’s investable universe of commercial real estate.”
McGregor adds that New Zealand’s stability and sustained growth are creating larger and more attractive opportunities for international investors, as previous limitations imposed by international investor mandates, which viewed New Zealand as too small, continue to erode.
“Stability plays in New Zealand’s favour. Many markets exhibited a significant decline in liquidity during the GFC, and material annual volatility since then. New Zealand’s transaction volumes hold up comparatively well in downturns. This is exemplified by the period of the GFC, during which major global and APAC markets had liquidity falling to, or below, New Zealand’s level. This is influenced by the higher numbers (as a percentage) of private investors active in the New Zealand market with the ability to buy big buildings.These privates are generally conservative with lowish gearing and have the ability to acquire big properties even in the slump.This is why transaction volumes in New Zealand hold up comparatively well during cyclical downturns.
“The New Zealand CRE market remains healthy with strong demand for investment grade assets, value-add opportunities and maturing asset classes offering comparatively higher returns. .Given New Zealand’s favourable relative growth, our return differentials continue to prove attractive, especially in light of the low cyclical volatility exhibited by the market.
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CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue). The company has more than 90,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 480 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com..