New Zealand Market Yield Outlook Update September 2024 - Prime Commercial and Industrial Property

Insights

• The Prime commercial and industrial property market is currently influenced by declining interest rates and weakening market rental growth. This is expected to continue in the next year or so. How this trend will influence property yields is a key question for yield forecasting.
• To enhance the forecasting outcomes during market turning points, CBRE Research has refined its market yield forecasting model through a closer analysis of cyclical turning points to predict yield movements in the next two years.  
• 10-year bond rates have the closest long-term relationship to property yields across cycles. However, when examining the last two cyclical market turning points, it becomes evident that swap rates exhibit a stronger relationship with yields during these periods.
• CBRE’s econometric analysis indicates yields respond to changes in interest rates with a delay of two quarters in the last three major market turning points. Our model also shows that compared to the historical average, yields are less sensitive to interest rate changes during a turning point. This means that a given rate of interest rate movement produces a lesser movement in yields at these points in the cycle.
• Nonetheless, recent and future anticipated interest rate decreases will result in declines in Prime commercial and industrial property yields.  This will happen in the face of a challenging occupancy and rental environment.  
• As interest rates stabilise in 2026 and market rental growth rebounds, yields will continue to firm, albeit at a more gradual pace. Rental growth will play a more important role in this process.  Therefore, we forecast yields will firm by 30 bps to 6.50% by Q1 2025, and firm more gradually to 6.13% by the end of 2026.
• The margin between average prime commercial and industrial yields to swap rates is forecast to expand to 293 bps by the end of 2026, larger than recent margins which have been below 200 bps but 150 bps lower than the average post-GFC margin.
• Since late 2020 CBRE Research’s market yield assessments have become somewhat disconnected from the average of adopted valuation cap rates observed in published book values of listed property portfolios and it is uncertain how our forecast market yield declines during 2025-2026 may flow through to actual portfolio values. Whilst market yields may firm by the forecast average of c.70 basis points to the end of 2026, the magnitude and timing of adopted valuation cap rates and resultant portfolio value improvements could be quite different.