Market Insights – August 

In advance of our investor event later this month, Gavin Read from JLL and Rohan Koreman-Smit from Forsyth Barr shared their top-line insights on the current environment, the expected impact of rate cuts, and the opportunities that could arise from the current bottom-of-the-cycle dynamic. 

Jones Lang LaSalle (JLL) Head of Research, Gavin Read  

Over the last 12-18 months, property owners have had to adjust their businesses to the higher funding and cost environment, which has resulted in a slowdown of transactions, opportunities, and near-term returns. 

 It’s not just the property market that has been impacted – many businesses across New Zealand are feeling the pinch too. While we are not quite out of the woods yet, there are signs that there is light at the end of the tunnel, but with some bumps along the way.   

Easing interest rates should provide much-needed relief to many borrowers, and a boost in market confidence.  The focus for owners in the near term should remain on retaining and securing quality tenants with strong covenants, to support optimal returns in the long run.  

The ‘dry powder’ that has been sitting on the sidelines will start to seek a home, resulting in an expected increase in transactional levels – however not to the heady heights of 2021.   

Internationally, we are seeing ESG as a significant driver for institutional investors. Understanding and actioning Green Star and / or NABERS ratings are critical to ensure that in the future, commercial property assets remain relevant for both investors and occupiers.   

 In general, property investments require a long-term investment horizon. At what is likely the bottom of the cycle, and with 2025 just around the corner, the time is right for investors to take advantage of this shift and ensure their strategies have been reviewed for this next phase of growth.  

There will be opportunities, so be ready in the event that one arises that suits your risk appetite and profile.   

Rohan Koreman-Smit – Senior Analyst – Forsyth Barr Limited   

Interest rate sensitive asset classes generally benefit the most from cash rate cuts as the yields on offer once again become competitive with other options, such as term deposits, which tend to decrease in attractiveness.   

Bonds and equities that offer a relatively certain income stream, such as commercial property, infrastructure, and utilities should perform well as interest rates begin to fall.   

It is important to remember however, that falling interest rates are a sign that the economy is going through a tough time, and this could result in lower tenant demand, slower rental growth, and higher rates of tenant insolvencies in the subsequent period.  

Property is ‘late-cycle’ in that vacancy rates and market rents typically take around two years to fully trough after a recession. 

In the near term, investors will need to focus on the underlying quality of the cash flows that back the distributions and underlying asset values – current lease terms and tenant covenants, building quality and capital requirements, asset use profile and location, which underpins current and future tenant demand.  

Over the next 12 to 18 months, we expect the quality end of the commercial property sector, which typically has higher-quality tenants, to perform well as investor demand for property exposure increases.  

Any recommendations or opinions in this publication do not take into account your personal financial situation or investment goals and may not be suitable for you. If you wish to receive personalised financial advice, please contact your Forsyth Barr Investment Adviser.