The trends and forces emerging in 2022 was the focus of this year’s New Zealand Market Outlook. The line-up of CBRE presenters discussed key changes that have taken place in the market and a number of highlights as we move forward into 2022.
Could retail be 2022’s surprise story?
Despite uncertain economic and geopolitical times, prospects for property are healthy, underpinned by the following factors:
Positive occupier demand for good quality space. Combined across Auckland, Wellington and Christchurch, net absorption of Prime space exceeded 50,000sqm in 2021. Already-strong industrial absorption has become even stronger, and retail centre absorption has also remained positive through the last two years.
Vacancy is tight in many markets, and forward demand indicators are positive. Industrial space demand will continue to grow: our recent survey of industrial occupiers indicates continued growth expectations, hybrid working for offices is starting to settle into a new normal which is not expected to drive significant reductions in space requirements.
Retail could be a 2022 surprise story. New Zealand is an expansion target for many Australian retailers planning bigger store networks. More than 60% of Australian retailers in CBRE’s survey last October expect to increase store numbers and upgrade to better locations.
Inflation pressure is pushing up economic rents and yields. Despite the Ukraine crisis, economic growth in New Zealand should be supportive of occupier demand over the next two years. Inflation is directly impacting costs, which are now coming through rental inflation, especially for new builds, and will be putting upward pressure on market rents more generally in the next two years. Expected interest rate rises will also continue to put upward pressure on yields. While average Prime New Zealand yields have provided a larger margin to interest rates than the period leading up to the GFC, which was the last time we have seen yield corrections, we do expect some upward pressure on cap rates in 2022.
The overall outlook for returns suggests a moderation this year as higher rent growth is offset by a lack of yield-based capital return growth as cap rates ease. The weight of capital is placing greater emphasis on lower risk rather than maximising return potential, and it is only in 2024 that we expect total returns to climb back into double digits.
2022: the year overseas investors return to New Zealand property
After two years of suppressed overseas investment, New Zealand’s commercial property market can expect a surge of activity in coming months once the borders are fully open. Foreign capital is set to make up at least two thirds of acquisition activity this year and next, mirroring 2014 and 2018 levels.
We are already seeing evidence of pent-up demand for investment grade assets in New Zealand, and we expect a significant rebound in office transaction activity in particular this year. During 2020 and 2021, $20m+ transactions to foreign buyers dropped by $1.67 billion versus the two years leading into Covid. With the borders closed, it has been just too hard for investors to get here to fully undertake their due diligence. This drop has been only partially offset by local investors, who increased activity to the tune of $880 million over the two years.
With New Zealand’s borders now starting to re-open, office assets are due to attract a great deal more capital investment. Recent announcements by Precinct Properties show the ongoing keenness of major offshore players on quality assets in our main markets.
Considering the alternatives
New Zealand is seeing the strengthening of the Multifamily/Build-to-Rent sector, which is the fourth major sector globally, along with an introduction to the emerging Alternatives sectors.
Globally focused Alternatives and their place in New Zealand
Cold Storage: With New Zealand exports growing by an impressive 60% in the past nine years which is underpinned by growing consumer demand, the cold storage sector holds inherent strong potential in New Zealand.
Data Centres: Digital transformation will continue to drive data demand growth, and therefore the demand for data centres. New Zealand is on the cusp of this sector’s growth.
Build-to-Rent/Multifamily – an opportunity we need to capitalise on
The key reason New Zealand is lagging is that our legislative framework is holding us back with a lack of government action to support the sector. The Government has signalled support over the course of 2021, but we urgently need this to materialise.
The opportunity within New Zealand for Build-to-Rent is fast emerging with the entry of an increasing number of institutional parties into Build-to-Rent development, an investment which should significantly boost supply.