Cycles are a property reality

Almost six months into the year and the answer to that perennial ol’ chestnut “how’s the market?” is become trickier to answer.

What we do know is that overall commercial and industrial deal numbers were down year-on-year for the March quarter – however, that in itself is not a fair barometer of the market out there.

A new property cycle has started, and how long it will last is anyone’s guess.

We can’t definitively say what inflation’s going to do to yields relative to the cost of debt as it’s an evolving playing field and returns from commercial and industrial property need to be viewed from a risk-adjusted position.

The latest MSCI analysis for the March quarter points to a reduction in industrial capital growth but accelerating income returns, and picks that strong retail income returns will remain that way due to inflation.

Maybe property cap’ rates have reached the top of the cycle – but there are lots of moving parts with rising rents, different sectors and grades of property coming into play, and credit and lease structures to consider.

Regardless of which way you look at it, real returns from commercial and industrial assets are still very attractive relative to fixed interest, with after-tax returns on money in the bank remaining firmly in the negative.

In a tightening economic cycle, owners of commercial and industrial property assets need to weigh up the pros and cons of doing a deal now versus sitting on their hands.

Some owners will tap the brakes, assess risk and rejig balance sheets, while others will bite the bullet and divest – knowing that on a relative basis, they have captured value at the point in time of the cycle.

The good news is that offshore buyer interest is back, and there’s still a lot of capital out there looking for a home, with significant interest being shown in the New Zealand market.

Everyone seems to be regrouping post-pandemic and, having recently spent some work time across the Tasman, it was great to see Sydney and Melbourne CBDs cranking back to life.

Given they’re around three months ahead of us in the pandemic cycle, we can take heart from that.

There will inevitably be labour market challenges ahead – something New Zealand needs to get a handle on, particularly as we’re banking on a strong bounce-back in the tourism and leisure markets.

However, while there is clearly some uncertainty in the market at a monetary level, there is plenty of certainty being demonstrated in the occupier market.

We’ve seen a huge lift in leasing activity and a stabilising or lift in benchmark rents across the various property sectors.

Staff are returning to the office, with corporate occupiers reacquainting themselves with the water cooler and enjoying conversations in the corridors and lifts – a far cry from virtual meetings.

At one extreme we see US-based Elon Musk insisting that all Tesla employees stop remote work and come back to their core office for at least 40 hours per week or they will be dismissed – and at the other, corporates declaring a gradual return to the office with a mix of remote working and in-person.

Along with a surge in leasing enquiry, lease structures are also changing with a swing to shorter terms, inherent flexibility, and rent reviews moving away from CPI benchmarking.

These are interesting times, for sure, and for the first time in more than two years, there’s been a resurgence in the business sales sector, with business owners transacting with far more confidence.

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