Brief | Intelligent Investment
New Zealand Cap Rate Drivers and Outlook Study
An exploration of the variables that play a pivotal role in shaping property cap rates, the ways in which they exert their influence, and what this suggests for future cap rate movements
April 29, 2024 7 Minute Read
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Key Points:
- Bond rates and rent growth are significant variables shaping cap rates, but the nuances in which they influence cap rate outcomes are most important.
- There isn’t a 1 for 1 relationship between bond rate and cap rate movements, a result that aligns with behavioural finance and economic concepts, and reflects the complexity of market mechanisms. This means for example that when bond rates fall, their spread to cap rates tends to widen which helps explain the high bond to cap rate spread during the low interest rate era post-GFC.
- We have produced optimistic and pessimistic scenario cap rate forecasts based on plausible ranges for bond and rent movements to the end of 2025. Our model indicates a difference of 38 bps in cap rate outcomes. In the pessimistic scenario, the Prime cap rate will stand at 6.77% in December 2024, 3 bps higher than in December 2023, and firm by 26 bps in 2025. The optimistic scenario suggests cap rates will firm by 19 bps in 2024 and by another 43 bps to 6.12% in 2025.