[+] NZ’s Fortunes Pointing Way for Australia

The New Zealand residential property market is in free fall with residential house prices expected to tumble another 10 per cent this year. Meanwhile, the overall commercial market is also struggling as inflation soars above 7 per cent. Things are far from rosy for the Land of the Long White Cloud—and it’s unlikely 2023 will hold a miracle turnaround. Long considered a bellwether for the Australian property market, what is happening now to our neighbours across the ditch will likely become this nation’s reality before much longer. With that in mind, The Urban Developer has dug deep into the state of play in Aortearoa. The Real Estate Institute of New Zealand December 2022 figures reveal that housing sales are at a 12-year low, with inventory soaring and house prices down 13.7 per cent year-on-year. The number of residential property sales across New Zealand decreased annually by 36.1 per cent between November 2021 and November 2022. “The supply of properties is low at present but increasing as retail interests hike and we can expect this to continue through to the middle of 2024,” Cushman and Wakefield managing director New Zealand Paul Huggins says. “The cost of housing repayments will force some to sell and the market will stay flat or reduce the house prices by up to 10 per cent in the next 12 months and that should be the bottom of the movement. “Then a gradual recovery should take place.” The New Zealand inflation rate currently stands at 7.2 per cent, its highest level since 1990. The official cash rate is 4.25 per cent—some analysts are predicting it will reach as high as 5.75 per cent, putting stress on mortgage repayments coupled with falling house valuations, meaning New Zealand homeowners are seeing their equity reduce dramatically. ▲ Homes in Wellington NZ: supply is a growing issue. “The significant drop in sales is largely due to vendor expectations versus what a purchaser is willing to pay—or can afford to pay,” MaxCap New Zealand chief investment officer Nick Bullick says. “New Zealand was the first country in the world to begin lifting rates in October 2021 and in the space of 13 months the official cash rate (OCR) went from 0.25 per cent to 4.25 per cent with more rises expected. “These are unprecedented times for mortgage holders and potential sellers holding off going to market and buyers generally looking for bargains. “I expect the residential market to continue to decline in 2023, as the majority of fixed rates roll off and households adjust to the higher cost. “There should be some reprieve in 2024 as we should see things start to turn with rates stabilising and the potential for rate cuts.” Commercial property Commercial property has been a mixed bag for New Zealand investors. The industrial market has been the standout, while retail has performed admirably, while the office market, like Australia, has been indifferent. “Reflecting the general profile of economic activity, the current strong occupier market momentum in the industrial market, retail sales and office occupier activity for good quality and well-located space will continue into 2023 but will lose steam into the second half of the year,” CBRE head of research, New Zealand Zoltan Moricz says. “As absorption dissipates and vacancy builds, especially in sectors exposed to higher relative volumes of new supply, the net result will be lower rental outcomes. “The investment market has continued to see wide bid-ask spreads and very little trading. “We expect that sales volumes will increase in 2023 with more motivated sellers coming to the market driven by the need for greater liquidity in light of debt financing pressures as higher interest rates flow on to lower interest cover ratios.” ▲ Visitor numbers to New Zealand have lifted significantly and will continue to do so. The labour market softening is forecast to be mild in the context of previous cycles with unemployment expected to stay below 5 per cent. “The post-pandemic recovery in tourism is continuing apace. International tourist numbers have climbed rapidly since the border reopened with 161,000 visitor arrivals in October, 57 per cent of the pre-pandemic norm for the month. “The resulting lift in services exports will be an important boost to demand, helping to fill the void left by the pullback in consumer spending. Migration is also starting to turn positive.” Office, retail and industrial market “The office market here is following the trends seen in Australia in particular,” Huggins says. “The volume of office transactions is focused on the good quality stock and revolve around new ways of working to suit the work-life balance trend. “Companies are resizing and looking for efficiencies, utilising shared spaces and tenancy movement continues at a reasonable pace. “However, investments in offices are beginning to slow with the level of business confidence being estimated as the lowest in 50 years having an impact. “The outlook is variable and probably too uncertain for us to estimate yields as we navigate through the inflationary pressures and reserve bank reaction.” ▲ Office blocks in Wellington: the office sector has mirrored the Australian experience of the past few years. The industrial market has been performing strongly with stock now at a premium. “There is a low supply of new high-quality industrial developments,” Huggins says. “The main challenge has been finding suitable options to offer at reasonable terms, especially in leasing. “Leasing yields are increasing due to shortages and high demands, and as a reaction to the pending inflationary costs. “Furthermore, some landlords have provided concessions through Covid to tenants and now are making adjustments to pricing. “We probably expect that investment in industrial will continue with steady yields as demand is there. “Joint office/industrial space is very attractive and development areas are still an option here as you are likely to be able to get the right returns.” The retail sector, which has been a relatively strong performer, is bound to be hit by the continued rise in inflation and interest rates. The pressure on retailers to continue to sell at high volumes as consumer spending reclines will come to a head in 2023. ▲ Negative sentiment in the housing sector will flow through into retail. “The retail market generally performed well over the past couple of years but 2023 will be a big test for the sector,” Bullick says. “Negative sentiment caused by declining house prices and less discretionary income availability will have a big impact on retail sales and in turn, non-discretionary retail centres. “Active asset managers will be ahead of this curve either repositioning or repurposing vacant space. “I still believe convenience retail—supermarket anchored—will perform well; however leases terms will dictate how well.” Looking ahead Most property analysts are predicting a better 2024 than 2023 as the government prioritises stifling inflation combined with interest rates peaking this year. It will be a difficult year to manage monetary policy, especially given the nation is due to go to the polls in October, with current prime minister Jacinta Adern last week indicating she will stand down next month, but there is light at the end of the tunnel. “While household budgets are under pressure and consumption is forecast to moderate in 2023, corporate balance sheets remain strong,” Moricz says. “Firms have generally built-up cash reserves during the past two years and many larger corporations also took advantage of low rates and the quantitative easing during the pandemic to refinance their debt and lengthen its maturity. “This will delay the speed at which higher market interest rates are reflected in debt service burdens.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

Industrial
Louis White
Fri 20 Jan 23

[+] NZ’s Fortunes Pointing Way for Australia

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