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Capital ready and waiting as commercial property market stabilises

New Zealand's Commercial Property Market: Coming out of Stagnation and Heading Towards Recovery.

November 9, 2023


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Dan Scott

Marketing and Pitch Director, New Zealand

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Following nearly 18 months of uncertainty and limited transaction volumes in the commercial property market, the market has bottomed out and is on its way back.

CBRE’s Auckland Capital Markets team predicts the market will settle into a ‘normalisation’ through 2024, with some transactional evidence having emerged this year indicating that yields have reached their cyclical peaks. However, these yield levels are not yet reflected in valuations.

Brent McGregor, CBRE Executive Chairman, said the transactions concluded in central Auckland this year – while few in number – indicate the market moving on from 18 months of stagnation due to dramatic interest rate increases and soft leadership from business in encouraging staff back into the office.

“In the 12 months to June this year, we barely had a single yield benchmark on central city assets. Now there have been some transactions which indicate where pricing has settled – and this data is also likely to suggest the market may have reached a cyclical trough.”

While a disconnect still exists between most vendors’ and all buyers’ expectations, the price gap appears to be closing, he added.

Only three Auckland CBD office buildings have changed hands in 2023: 8 Tangihua Street and 30 Mahuhu Crescent in the Te Tōangaroa/Quay Park precinct, and 51 Shortland Street. All transactions were handled by CBRE and settled in the third quarter of this year.

Prior to these transactions, only one CBD office building had sold in the previous 12 months, compared with six sales in 2022 and five in 2021, illustrating the market’s ‘holding pattern’ state this year amid a persistently wide bid-ask spread.

The pricing of the 2023 transactions indicates a 30 to 40% discount to the peak asset valuations recorded between Q4 2021 and Q1 2022, said McGregor.

“While very few transactions have occurred this year, the deals that have settled do provide some evidence of the market having bottomed out. There has been fairly skinny buyer depth this year with institutional and offshore investors waiting for the privates to re-price the market, and for the RBNZ to clearly indicate that rate hikes have ended, before re-engaging.”

The Te Tōangaroa portfolio comprised two A-grade office buildings totaling around 22,000sqm, with BNZ and Latitute Financial Services as key tenants. 

The buildings were sold to a joint venture between Precinct Properties, global private investor Pacific Asia Group (PAG) and Ngāti Whātua Ōrākei in August, for $60 million representing an analysed freehold equivalent yield of around 11%.

51 Shortland Street, a prominent 18-level CBD asset opposite the Vero Centre, was sold to Robt. Jones Holdings for a confidential sum which analyses to an approximately 8% equivalent yield. 

It was the first decent CBD office tower to be offered on the open market in nearly three years and also represented Robt. Jones Holdings’ first foray back into the Auckland market in nine years. Robt. Jones Holdings now has a significant Auckland portfolio of 100,000sqm of office accommodation.

Warren Hutt, CBRE Senior Director of Capital Markets, said the transactions reinforce that capital still exists and is waiting patiently for deployment to the right investment opportunities.

“We predict some attractive buying opportunities emerging in the next 12 months as the market starts to rebound.”

"However, while there is liquid capital in the market, sellers still need to adjust their thinking to the new reality of pricing levels, with borrowing costs 500 basis points higher than two to three years ago", he said. 

“We believe the transactions that have occurred this year provide a reliable indication of current values. These align with the cost of debt increasingly becoming accepted in many markets as being higher for longer, including New Zealand."

Compared with the post-GFC period where the official cash rate fell by five per cent in just nine months, this time around we have persistent pressure for rates to stay high.”

Other commercial property sectors also subdued

In the commercial property market overall, the total value of commercial and industrial investment transactions over $20m in the three main centres nationally year to date reached $1.5 billion across 27 sales. This was approximately half the volume of 2022 and a third of the volume in 2021. While transaction volumes were low, there were a couple of notable highlights:

In September, CBRE brokered the sale of a 6.4ha block of undeveloped land adjacent to Ellerslie Racecourse, known as 'The Hill', for a confidential sum reported to be over $100m.
In April, CBRE and Savills brokered the sale of a 105ha site in Karaka, South Auckland to Fisher & Paykel Healthcare, for $275 million – thought to be the biggest land transaction ever concluded in New Zealand. 

Currently, CBRE Managing Director of Industrial & Logistics Bruce Catley is marketing 20 Puaki Drive, Wiri; a 33,000sqm ‘next-generation’ distribution centre leased to automotive and industrial parts distributor GPC.

Offshore capital hovering with anticipation

Globally, markets have been in a period of price discovery for some time, with investment volumes in Europe down 57%, the United States down 53% and Asia Pacific down 40% year on year to September 2023.

The weight of dry powder globally is now unprecedented, with USD 271 billion (NZD 450 billion) of uninvested capital mandated for property investment, according to market data provider Preqin.

"Recent transactions offer sought-after evidence and confidence of a gradual return of foreign capital to our shores as uncertainty around interest rates, inflation and the election outcome settles, either investing directly or as capital partners alongside New Zealand managers." Says Hutt.

“Investor sentiment from key offshore buyer markets such as Singapore is that New Zealand is likely to be an attractive yield destination given recent market pricing. We are expecting to see an upswing in confidence in local assets emerge among offshore buyer markets in Q4 and into next year.”