Despite some uncertainty and short-term disruption to market conditions from COVID-19, low interest rates are fueling investment activity, especially for prime properties with strong covenants. The flight to quality and limited stock available to purchase is likely to elevate the level of competition amongst experienced investors driving values higher.
Overall Investor Market Conditions
The economic downturn created by the COVID-19 lockdowns and the introduction of border restrictions has created economic disruption that has reduced the current level of commercial market activity.
However, investors are conscious that a rebound and resumption in more normal market conditions could eventuate due to the forced short-term nature of the situation. As a result, investors are turning their focus towards the solid market conditions leading up to COVID-19 and reviewing the fundamentals. Although not as strong, investors are postulating that the current uncertainty created by COVID-19 could be accommodated in many circumstances, especially if incorporating longer-term projections.
While vacancy rates are expected to lift from 20-year record lows, the secondary sector is facing more challenging market conditions than in the prime sector, as occupiers and investors pursue quality premises.
Despite some uncertainty and understandable cautiousness, investors are spurred on by low interest rates, which will continue to remain low (and may reduce further) for an extended period under current forecasts.
The RBNZ continues to keep monetary policy settings accommodative and financial markets liquid, but there is an overall reluctance from major banks to write new business. This uncertainty has increased the demand for debt advisory services, which are proving beneficial. We are also noticing a greater number of non-bank lenders, high net worth privates, domestic and institutional funds entering the market, albeit at a higher cost of capital.
A recent Colliers International APAC research report noted that the yield spread over ten-year government bonds in New Zealand was amongst the highest in the APAC region. In addition, New Zealand’s approach to dealing with the virus has enhanced its international reputation as a safe haven which is likely to spur greater overseas interest in local assets. In the short-term, the ability of overseas investors to transact will be tempered by border restrictions in place, and likely for the remainder of 2020. A sharp lift in international activity is anticipated once restrictions are lifted, prior to this however, domestic players look likely to take the opportunity to fill the gap.
A lack of alternative options to generate returns will keep investment activity high, however, competition for a short supply of prime assets available to purchase will remain a challenge. This could lead to a return of fear of missing out for investors. If this eventuates, it is likely to push yields lower and capital values higher for quality stock with positive attributes.