High interest rates, inflation driving down commercial property investments

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First-half industrial property sales accounted for about a third of the total sales with 29 properties (34 percent) selling for $487m.
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Commercial property investment has been hit by high inflation and interest rates thereby leaving institutional investors on the sidelines for the first half of 2023.

A report by commercial property firm CBRE found the overall value of commercial sales dropped by $374 million from the second half of 2022, due to low sales volumes, and a wide gap between offers and asking prices.

CBRE executive chair Brent McGregor said private investors accounted for most of the 59 commercial property sales over the first half of the year with a total value of $1.28 billion across the three main centres.

However, he said overseas institutional buyers were absent from the New Zealand property market over the first half, put off by 8 percent interest rates with rental yields based on 5 percent interest.

“If you’re thinking in terms of international interest in New Zealand property, we’re seeing buyers compare New Zealand to other investment destinations and if the alternative is investing in Australia, where borrowing costs are 100 to 150 basis points lower, then that becomes more of an attractive proposition,” McGregor said.

He said the market was waiting for interest rates to peak.

“Things are pretty close to bottoming out. It does depend on the interest rate trajectory, and we’re not quite sure if we’re at the top of that cycle yet.

“There’s a lot of capital sitting out there waiting to be deployed, so the bottom of the market might be a short-run thing and I could see maybe six months’ worth of really good buying before prices start to to elevate again.”

Meanwhile, first-half industrial property sales accounted for about a third of the total sales with 29 properties (34 percent) selling for $487m.

Development sites accounted for 30 percent of total sales, retail at 21 percent, and office at 11 percent.

Demand for office property was the most subdued with nine sales totalling $145m, compared with 13 sales in the previous six-month period at $498m.

Auckland sales accounted for $1.09 billion of the first half total, followed by Christchurch at $140m and Wellington at $50.3m.

Overall, overseas investors spent net $93m more on property than they sold.

Most of the private investors were Australian, buying about $117m of retail and industrial properties, followed by Germany with a $29.3m investment in a Wellington office building, Singapore with a $28m Auckland office building, and Canada with a $24m investment in industrial property in Auckland.

Other large transactions included the sale of a $7.2m industrial property by a private Asian investor.

Big box retail property Investore fund manager Adam Lilley said the commercial retail property market was lukewarm and a buyers’ market for now.

He said the high-interest rate environment, as well as inflation, had driven down demand for commercial retail properties, and was the main driver behind a 6.6 percent drop in the value of its portfolio over the past six months.

However, Lilley said the underlying value of Investore’s portfolio was resilient, with defensive rental income from the non-discretionary retail sector, such as supermarkets, accounting for 99 percent of its leases.