New Zealand's commercial property sector continues to face negative demand, with general sentiment being the third most negative in the Asia-Pacific Region, according to the Royal Institution of Chartered Surveyors' (RICS) latest Commercial Property Monitor.
The international survey, which measures commercial property demand around the world, found demand for commercial property in NZ declined between the fourth quarter (Q4) last year and first quarter (Q1) this year.
"Industrial, office and retail have all seen a further fall in occupier interest - as such, availability has risen," RICS said in a summary of the survey's findings.
It found overall commercial property sentiment was strongly negative, much more more so than in Australia, while China and Hong Kong were the only Asia-Pacific countries surveyed where sentiment was worse. (See second graph below).
Repurposing office space was still a feature of the market but at fairly low levels, with 79% of respondents reporting modest levels of repurposing, and 21% reporting no repurposing taking place, while downsizing was still a major feature of the office market.
A slim majority (52%) of respondents said more occupiers were looking to downsize their office space, while 14% said there had been no change and a third said downsizing levels had decreased.
As would be expected in a soft market, the biggest falls in demand and value had been in the second and third tier properties that were not considered prime.
"Quality is a key issue, as are funding and interest rates," the RICS said.
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37 Comments
Enter major CRE crash 2.0 into NZ.
Yes we can again beat the USA.....where its CRE is already staggering on the lower ledges, below the cliff.
Not only is the economic slowdown affecting commercial real estate, but also cultural shifts.
Working from home is not nearly as restricted as it once was. Result, less demand for office space.
Online stores with home delivery are reducing demand for retail and therefore retail space.
The conglomeration under giant organisations like Amazon will see less demand for warehouse space.
Even movie theatres are closing down as people netflix at home instead.
I do not foresee it going back to what it once was. We might even start seeing shopping strips bulldozed or repurposed for residential in the next ten years.
And people moving out of big cities, a house on land is better value than an urban kennel
I think on a per capita basis there will be a reduction of retail but with a growing population and there still being a desire by many to go to shops, there won't be an actual decline. I think it would have already happened by now if it was going to decline and they are still opening malls. Some town centres are declining but that's usually because new malls with parking are providing a better experience.
Office space will have some excess capacity for a while due to a dramatic cultural shift but that will still be taken up overtime and the per capita office space will be forever lower.
The new malls ban the parking and cars anywhere near the shops that's what improves the experience. You park on the periphery and walk.
I've thought it was interesting to post examples of the CRE apocalypse in North America and in other countries (some of the capital destruction is wild) while also trying to show the potential impacts on banks.
More than a few people have suggested that NZ is different and our CRE sector is immune from any apocalypse. I'm open minded and accept what they say. And anecdotally, commercial rents are even increasing in places like Raglan.
Having worse demand for CRE than Japan is an eye opener. Word at the water cooler is that Japan is an economic basket case while we've just experienced a few scratch wounds.
"Word at the water cooler is that Japan is an economic basket case while we've just experienced a few scratch wounds."
A famous Monty Python scene springs to mind.
I've been making that argument based on occupancy rates of the listed REITs. Maybe they don't reflect the whole market, but they give absolutely no sign of the huge vacancy rates seen in other countries. They are still suffering asset value destruction from higher interest rates, so the question is whether there is enough of that priced into current share price, or much more destruction to come.
For example, ARG reported an annual 5% revaluation loss today, but last reported an occupancy rate of 98.4%. trading on a 25% discount to asset value with about 36% gearing suggests another 15% or so fall in variations expected, or some other pain still to come.
Hi MFD I think I can explain this.
As a listed property stock the share price and therefore market value of ARG can adjust immediately.
Valuations on the other hand are a different matter. The large valuation firms are typically the larger commercial real estate agencies (JLL, Bayleys, Colliers, CBRE) who all derive their income from commercial property owners. These Valuers know that if they come up with a value below ARG’s expectations they will get fired and ARG will retain another firm who will give them a better number.
In order to prevent this happening they will typically work with landlords to slowly walk back valuations over a longer period of time. Investors in the know however are able to determine a more appropriate value via the share price.
In short valuations are often subjective, backwards looking and in some cases not worth the paper they are written on.
So the latest valuations are just rubbish (massaged higher) and the actual market (us, investors) knows the truth and pays appropriately.
Just like the debt rating agencies during the GFC in the US......all BS. Just doing their best to get paid and help the insiders exit and forestall the inevitable.
History is a great teacher, just a shame, most don't take this class!
Don’t listen to the water cooler too much
I can only reiterate my views that CRE will, IMO, be the catalyst for the next downturn. Vacancies is one thing and it is indeed bad, but the higher yields for valuing CRE (due to the higher interest), is where the real problem lies. Many CRE have not been repriced (down) properly yet. Banks can turn a blind eye to CRE being under water as long as cashflow pays the interest on the mortgage. When cashflow is insufficient, due to vacancies, banks will start calling in their bad loans, these will in many cases not cover the debt outstanding.
Who will fail first? Oyster? Kiwi? Goodman?
The smart ones have been developing high density residential near their commercial to boost demand. But is that demand enough, and has the pushed their debt too far?
I think private investors will fail first, before, before institutions. I know a few, luckily they have done very well in the past and they have a nice buffer. Said buffer is reducing by the month though.
Correct. Most of the 2nd and 3rd tier stock is held by unlisted funds, and there is a high number of single asset funds out there as well. Any drop in vacancy and cashflow and these funds have no buffer. Listed funds have a more diverse asset base, and can usually weather a drop in vacancy across the portfolio, whilst being able to sell assets to shore up gearing levels without being a distressed seller.
Listed Funds employee? How "diverse" are their assets? Not very. A similar fate awaits.
Capital raising activities to deleverage the balance sheet. Some commercial property owners are in negative equity.
https://www.nbr.co.nz/property/october-deadline-for-maat-capital-raise/
https://www.nzherald.co.nz/business/ellerslie-building-investment-schem…
"Auckland property investment company copped an auditor’s warning for borrowings exceeding assets by $13.9 million, breaching its covenants."
Expect more stories to come.
https://www.nzherald.co.nz/business/nido-investors-tell-of-heartbreak-a…
Property promoters will tell investors that real estate investment is safe.
Syndicators like Oyster are already in trouble. Property syndication was always an accident waiting to happen. A new JBL..
Kiwi only has a few office properties left, and hardly any exposure to government sector - so they will be fine.
The biggest part of commercial property that is downsizing is government departments, so any company with serious exposure to Wellington office property is probably the most at risk.
I'll come in and bat for you and your beloved property bubble Dr Y. The argument could be made that the commercial apocalypse doesn't really apply to SMEs and is being seen more in large-scale corporate property.
When you speak about SMEs, you seem conflate commercial businesses and CRE owners. The latter is the subject of this article, JC.
Not what I'm saying Dr Y. A corporate office property has different demand drivers to a smaller-scale property used for business such as panel beating.
Given that the corporate sector in NZ is relatively small, the argument can be made that the SME sector better defines the CRE property sector.
I'm batting for you, not against you.
When they strap us to a bed and feed us intravenously while entertaining us with a virtual AI world called the Matrix they will just need a few warehouses. Or they could repurpose the old caged chicken farms.
A few years ago I thought about repurposing to short stay. The tunnel vision council planners soon scared me off. Their lack of business skills quickly showed when they chanted their rule based mantra. Luckily I found a legal drug (vape) distributer to take the place. With 30 years of hindsight I should have stuck with residential.
NZ - the land of liquor stores, vape shops, pawn shops, op shops, and ethnic takeaways. All designed to absorb the 250,000 unskilled immigrants we keep importing each year. We are 15,000 people per year short of the skilled professionals that businesses need to expand and grow, and for productivity to increase.
New Zealand does sometimes appear to be on the road to resembling a developing country (devalued work, overvalued assets, gated subdivisions), but I wasn't expecting to see the wide availability of short-stay hotels quite yet.
In addition to the global CRE concerns, NZ has the added problem of the costs of complying with earthquake strengthening standards. Just to pour oil on the fire.
That sounds like a bit of the ol' inferiority complex. California and Japan also need to content with compliance costs for earthquakes.
Are those countries currently running a programme that says your building must be upgraded immediately or everyone has to vacate the building? The problem is NZ has only recently imposed the requirements (2017) and there is a 10 year deadline to find the funds and complete the work. All while Covid just removed the ability to do anything for 4 of those years. Now there is only 3 years left and building owners are dealing with higher interest rate costs, and lower rental income. So there is no money to do anything.
In the case of Japan, I'm sure they're somewhat more advance in earthquake proofing new builds.
An architect told me that NZ is only country that has passed a law requiring the retrofit of earthquake proofing to all buildings. Engineers are absolutely creaming it.
You don’t think that strengthening buildings at risk of unforeseeable collapse is a good idea?
The German office market fell 21% in Dec
Came up on the radar this week about Mitsui Fudosan, major commercial and residential property developer in Japan and globally. Stock price up 43% in the past 6 months and 78% in the past 12 months. Going great guns because of Japan's continuous development and renewal.
Interesting article. Firstly I should disclose that I have worked in the CRE space in NZ and offshore for 30 years.
In a professional capacity I act on behalf of corporate occupiers (tenants) but personally invest in commercial property and receive income as a landlord.
The RICS survey is interesting as it is landlords and landlords agents who are surveyed not tenants. I am surprised it is as negative as it is given the respondents. On the flip side given that I represent numerous tenants I can confirm that most are looking to right size allowing for ‘work from home’ and some staff reductions. Our experience is that this reduction is on average around 15-20%. Not catastrophic but certainly not insignificant.
Whilst I think values still need further adjustment downwards I don’t think the market will ‘crash’.
Those who I think will struggle are-
Syndicators. Oyster, Centuria, Mackersy, Silverfin etc
B-C grade office owners
Any investor geared at >50% based on 2023 values
I leased a second rate first floor office on State Highway 1.
I recall standing in the downstairs door "negotiating with the landlord about renewal. He wanted more money. "valuations". Blah blah.
I said from where I stood I could eyeball six first floor offices which had been empty sometimes for years. Landlord was unrepentant.
We moved, purchased a beautiful Art Deco house for an office. Main motivation was the whole commercial landlord thing worked on fantasy valuations and not the market. And absurdities like ratchet clauses.
The office we left was vacant for five years plus. As were most of the other six.
The "valuations" thing is Fantasyland. Weird.
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