Investors that evolve and adapt are leading the way

27 Oct 2021

By Richard Carr

To stay ahead of the curve, the commercial property sector continues to evolve and adapt to the current environment, remaining a focal point for prudent investors as it provides long-term returns for those that have secured strong assets. Across New Zealand and throughout the globe, organisations have proven agile to respond to the changes required over the last 18 months, and their physical environment must also respond in kind.

Within the commercial property sector, we’re seeing this evolution happen at pace. In the office the workplace is becoming more hybrid as employees require flexibility and the workspace adapts to ensure it attracts teams back onsite. Retail has quickly embraced ecommerce to remain relevant evolving its offering across both physical and digital spheres. The industrial sector continues to be strong, particularly the distribution arm, as modern living increasingly relies on prompt deliveries and access to consumer goods. We believe investors need to adapt in line with those changes or this may lead to effectively empty and stagnant assets.

High-quality assets have ensured their future viability with long-term tenant commitments, environmentally friendly designs, and desirable locations – there are now raised levels of competition from investors looking to acquire them.

This is proven in the excess of $8b in bids we’ve received since January 2020 for assets of significance of greater than $20m, though with the ability to only transact $1.6b due to the lack of saleable stock within the New Zealand market. There is unwavering demand for commercial real estate across all sectors and we’re receiving plenty of interest from offshore parties despite the current border restrictions, as well as New Zealand institutions flexing their muscles and increasing their purchasing activity compared to the last few years.

Due to the minimal returns currently available through bank deposits, vendors are proving reluctant to sell without having a plan for the realised equity. We know they are looking for continued strong returns and managed levels of risk and this strong investment strategy requires patience to protect investors capital. They are focusing carefully on physical due diligence around any future seismic remediation challenges and now expect detailed disclosure to facilitate this. However, the low levels of office vacancy in Wellington CBD continues to drive rent growth which in turn is attracting fresh investment capital.

In addition to the above, we are seeing investors and investment vehicles actively seeking opportunities to enhance or develop assets. These have vastly different purchasing mandates depending on their desired returns and willingness for risk; complex development projects provide larger returns than passive investments but require significantly more expertise to realise those returns.

With changes on the horizon including interest rate rises and workplace strategies evolving, long-term investors are proving to be practical, with their focus dominated on income stability and tenant covenant. Sale and leaseback assets opportunities are limited and these assets, particularly industrial and large format retail, are attracting competitive capital. The long-term net lease arrangements enable the buyer to estimate accurately the expected future rate of return while managing risk.

The predictability of commercial property continues to draw the attention of investors who are sensitive to the late stage of the yield cycle but eager to position themselves for add value opportunities. Though it’s hard to crystal ball how Q4 2021 and into 2022 will evolve with Covid-19, inflationary pressures and interest rate movements, we are encouraged to see many investors willing to respond, adapt and evolve to current pressures as businesses adjust to the new normal.

When awarding CBRE New Zealand the RICS Real Estate Agency Team of the Year Award, the judges panel commented that they recognised the complexity of the current market and that it requires comprehensive support for vendors and purchasers alike to better understand the nuances of the market. As always, our team is ready and willing to help advise and navigate our clients through this ever-changing market.