Outtakes from the Experts – Annual Oyster Investor Event ’24

Last week, to conclude our 2024 AGMs, we brought together a panel of industry experts from Kiwibank, JLL, Forsyth Barr and Oyster to discuss the current environment and outlook for the commercial property sector.

While near-term pressure remains for almost all sectors, the panel was united in its view that the start of the OCR easing cycle is a critical step in the right direction to relieve economic pressure – and that the commercial property sector stands to benefit in the coming years. 

We’ve shared a selection of the key outtakes from the discussion below.

From Oyster’s perspective, recent shifts in monetary policy and the stabilisation of valuations indicate a turning point for the commercial property sector.

Following the Reserve Bank of New Zealand’s (RBNZ) move to cut the Official Cash Rate (OCR) by 25 basis points to 5.25% in August, our re-forecasting process demonstrates that many of our funds may be positioned to increase distributions earlier than we had forecasted.

We are mindful that it will take time for rate reductions to fully translate to the bottom line, and aware that many of our tenants are feeling the full impact of this period of economic volatility today. Strong tenant covenants remain a key focus, alongside prudent capital management.

Looking ahead, we are focused on protecting and optimising the long-term value of our current assets and unlocking bottom-of-the-cycle opportunities to create new growth for investors.

A selection of outtakes from the panel discussion:

Mary Jo Vergara, Senior Economist, Kiwibank

• As a nation, we are shifting from a ‘survive ‘till 2025’ mantra to a ‘look to 2025’ sentiment. While the term is not as catchy, things are looking much more optimistic as we approach the next calendar year.
• Rate relief has started, and there is more to come – but the magnitude will be critical.
• The recent 25 basis point cut will not solve everything; however, Kiwibank is forecasting 11 further rate cuts, with the market already pricing in reductions of 50 basis points before the end of the 2024 calendar year.
• In Kiwibank’s view, RBNZ will lower the cash rate below the neutral rate of 275 basis points to 250 basis points to inject stimulus into the economy by 2026/2027.
• As term deposit rates flatten and fall in line with the cash rate, the commercial property sector will be attractive to investors hunting for yield.
• Monetary policy transmission in this cycle could impact our economy’s bottom line more quickly than in previous cycles.

Gavin Read, Head of Research, JLL

• Global sentiment in the commercial property sector has improved in the last twelve months. The laggard effect between interest rate easing and the property sector should start to take effect in 2025.  
• Sectors that have had strong rental growth, such is industrial and logistics, and prime CBD office should continue to see rental growth in 2025, but at a slower pace. Capital values should rise slowly, but both of these factors will depend on the asset’s quality.
• As we move into the next the cycle, quality assets should do better, while secondary assets that require significant capital works and / or sustainability upgrades may take longer to see improvements.
• While property owners feel the impact of a tighter economic environment early, the impact on tenants generally comes as the market moves through the bottom of the cycle. In this period, the quality of the tenant and covenants become more important.
• Demand remains strong across the industrial and logistics sector. Rental growth will continue albeit at a slower pace, supported by low vacancy levels. The pipeline of new assets is growing, where quality will be critical as competition increases.
• In the office sector, rental rates and vacancies have diverged when it comes to asset grade. We are seeing significant demand from occupiers for quality office assets, and while some organisations may be taking less space, they are paying more per square metre for locations with greater amenities and modern, collaborative spaces.

Rohan Koreman-Smit – Senior Analyst, Forsyth Barr

• Still some choppy times ahead for the listed and unlisted property sectors in terms of asset prices, vacancy levels, and rental growth. However, in the medium term, Forsyth Barr believes New Zealand is setting up for a solid cycle.
• Construction cost inflation will slow and create more competition in the market.
• Asset quality is more important than ever, and the focus will be on location and tenant covenants.
• The listed market is generally a good indicator of future asset prices. Listed property share prices felt the pain a lot earlier (than unlisted funds) and are still bouncing along the bottom regarding discounts to Net Tangible Asset prices (NTA). This suggests there could be still more downward valuations for some properties but indicates we have reached the bottom.
• Historically, easing cycles have driven good performance from the commercial property sector due to the hunt for yield that arises. As interest rates decline, investors will need to look beyond term deposits to find a new home for their cash. Property is a great yield sector—anything with a reliable income stream will be looked at favourably.
• Regarding investment flow, best-in-class listed property companies seeking capital are seeing good interest from offshore capital. As this starts to flow into the market, it supports asset valuations.
• Green funding is bringing debt costs down for investors committed to ESG – and sustainable assets will also positively impact rental growth. Green isn’t cheap for asset owners, and tenants will need to account for this in rental costs.

Fabio Pagano, Oyster Property Group, General Manager – Property

• The start of the rate-cutting cycle is providing immediate annualised reductions in fund costs, which will go straight through to the bottom line and continue to have a positive impact into 2025.
• Interest is one of the most significant costs we see across our funds, and we will pass these cuts down to our investors wherever we can – for some funds, this will mean improved distributions sooner rather than later.
• We are seeing a flight to quality across the Oyster portfolio – but there is a cost-balancing dynamic at play for many tenants.
• Tenants want quality but are not positioned to spend at this point in the cycle. It is more cost-effective for all parties to keep our tenants in their spaces and make small incremental improvements over time.
• ESG initiatives need to be more than just a star on the wall. We are investing in things like NABERS ratings and metering systems to support tenant procurement requirements, and this is also driving down costs and creating operating efficiencies for our tenants.

The content of this email is current as of 5 September 2024. It is not intended as financial advice. Please seek advice from a licenced financial advice provider before making any investment decisions.

Kiwibank: All content is for information only, is subject to change and is not a substitute for commercial judgment or professional advice, which should be sought prior to entering any transaction. To the extent permitted by law Kiwibank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.

Forsyth Barr: Any opinions in this publication are not (and should not be construed as) advice to buy or sell any financial product, or to engage in or refrain from doing so, or to engage in any other transaction; and any recommendations 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.  To the maximum extent permitted by law, Forsyth Barr excludes and disclaims any liability (including in negligence) for any loss which may be incurred by any person acting or relying upon any information, analysis, opinion or recommendation in this publication.