Potential buyers should be prepped and ready for active capital to make a strong return to the New Zealand market within the next 12 to 18 months, according to Bayleys market analysts.
Bayleys Senior Director – Capital Markets Jason Seymour says though transaction volumes have been low through 2023, he is confident there is plenty of capital waiting in the wings, just holding for the right investment conditions.
“My sense is that there is no shortage of capital to be deployed, just a lack of confidence around when is the best time to buy. Waiting to call the bottom of the market, may not be the best strategy as the current thin competition for most assets will ramp up quickly,” he says.
While some investors may be waiting for bigger players to move first, Seymour says experienced investors are prepared to be patient.
“Many of these groups have been largely inactive from an investment perspective over the past few years, patiently waiting for re-priced trophy or strategically important assets to be released to the market.”
Recent sales in Auckland of an 18-level office building at 55 Shortland Street, and The Warehouse development at 100 Pah Road are excellent examples of historically tightly held assets selling to highly experienced, patient capital, Seymour says.
Another encouraging sign for the revival of investor activity lies in the level of offshore interest in New Zealand real estate, he says. “It remains a live target market for investment mandates, although diluted in some cases by the growing number of opportunities in Australian domestic markets and other markets globally.”
Seymour cites Asia Pacific investment firm PAG’s recent joint ventures with Precinct Properties for 40 and 44 Bowen Street in Wellington for a total purchase price of $240m as a prime example of recent active cross-border capital flows. A recently announced deal between Precinct Properties, PAG and Ngāti Whātua Ōrākei for Auckland’s Te Tōangaroa precinct is another.
“The reasons to invest in New Zealand are compelling: indefeasibility of title, no land tax, stamp duty or capital gains tax and low levels of corruption all significantly reduce transaction risk and costs.”
Seymour says the current investment landscape in New Zealand reflects what is happening globally, as laid out in the recent Active Capital Q4 Outlook from Knight Frank, global property insights company, and Bayleys’ commercial partner.
That report was an update to Knight Frank’s 2022/23 Active Capital report, examining how its predictions have played out and what lies ahead for Q4 2023 and beyond. In it Knight Frank head of capital markets research Victoria Ormond says many leveraged investors are likely to be focused on reworking their existing assets that will come to be refinanced over the remainder of 2023, instead of buying.
“There is significant weight of money out there waiting for the right moment to be deployed. Some investors are waiting for repricing to catch up to where they perceive it needs to be. Others are waiting to call the bottom – notoriously difficult and usually swift,” Ormond says in the report.
The other challenge has been a divergence of opinions on what comes next, Ormond reports. “Base rate forecasts globally are typically looking at peaking over the end of 2023 and into the first quarter of next year, with the question then becoming when and how steeply will they reverse?”
New Zealand’s economic drivers are heavily influenced by events beyond its borders, which have a relatively predictable impact on New Zealand in areas such as our export markets and capital flow, says Seymour.
The best way for buyers to prepare for opportunity in the current market is to ensure they are ready to act at speed, he says.
“While a year ago there was some expectation that interest rates would level off and start reducing, the current sentiment favours ‘higher for longer’ in the face of stubbornly high inflation,
Opportunity and optimism should increase over the next 12-18 months as transaction volumes increase and some degree of stability returns to the markets underpinned either by the levelling off or reliable forecasts of declining interest rates.
“Over that same period, markets will have greater clarity around the impacts of higher yields on 10-year US Treasury notes and the risk spread for alternative investments including real estate.”