Capital ready, waiting as market stabilises: CBRE
Following nearly 18 months of uncertainty and limited transaction volumes, the commercial property market has bottomed out and is on its way back, CBRE’s Auckland Capital Markets team predicts.
It believes the market will settle into a ‘normalisation’ through 2024, with some transactional evidence having emerged this year to indicate that yields have reached their cyclical peaks. However, these yield levels are not yet reflected in valuations.
Brent McGregor, CBRE executive chairman, said the transactions concluded in central Auckland this year — while few in number — indicate the market moving on from 18 months of stagnation due to dramatic interest rate increases and soft leadership from business in encouraging staff back into the office.
“In the 12 months to June this year, we barely had a single yield benchmark on central city assets. Now there have been some transactions which indicate where pricing has settled — and this data is also likely to suggest the market may have reached a cyclical trough.”
While a disconnect still exists between most vendors’ and all buyers’ expectations, the price gap appears to be closing, he added.
Only three Auckland CBD office buildings have changed hands in 2023: 8 Tangihua St and 30 Mahuhu Crescent in Te To¯angaroa Quay Park precinct, and 51 Shortland St. All transactions were handled by CBRE and settled in the third quarter of this year.
Prior to these transactions, only one CBD office building had sold in the previous
12 months, compared with six sales in 2022 and five in 2021, illustrating the market’s ‘holding pattern’ state this year amid a persistently wide bid-ask spread.
The pricing of the 2023 transactions indicates a 30 to 40 per cent discount to the peak asset valuations recorded between the final quarter of 2021 and the first quarter of 2022, said McGregor.
“While very few transactions have occurred this year, the deals that have settled do provide some evidence of the market having bottomed out. There has been fairly skinny buyer depth this year with institutional and offshore investors waiting for the privates to re-price the market, and for the RBNZ to clearly indicate that rate hikes have ended, before re-engaging.”
The Te Toangaroa portfolio comprised two A-grade office buildings totalling around 22,000sq m, with BNZ and Latitute Financial Services as key tenants.
The buildings were sold to a joint venture between Precinct Properties, global private investor Pacific Asia Group (PAG) and Ngati Whatua O rakei in August for $60 million, representing an analysed freehold equivalent yield of around 11 per cent.
51 Shortland St, a prominent 18-level CBD asset opposite the Vero Centre, was sold to Robt Jones Holdings for a confidential sum which analyses to an approximately 8 per cent equivalent yield.
It was the first decent CBD office tower to be offered on the open market in nearly three years and also represented Robt Jones Holdings’ first foray into the Auckland market in nine years. Robt Jones Holdings now has a significant Auckland portfolio of
100,000sq m of office accommodation. Warren Hutt, CBRE senior director of capital markets, said the transactions reinforce that capital still exists and is waiting patiently for deployment to the right investment opportunities.
“We predict some attractive buying opportunities emerging in the next 12 months as the market starts to rebound.”
While there is liquid capital in the market, sellers still need to adjust their thinking to the new reality of pricing levels, with borrowing costs 500 basis points higher than two to three years ago, he said.
“We believe the transactions that have occurred this year provide a reliable indication of current values. These align with the cost of debt increasingly becoming accepted in many markets as being higher for longer, including New Zealand.
“Compared with the post-GFC period where the official cash rate fell by five per cent in just nine months, this time around we have persistent pressure for rates to stay high,” Hutt said.
The total value of commercial and industrial investment transactions over $20 million in the three main centres nationally year to date reached $1.5 billion across 27 sales. This was approximately half the volume of 2022 and a third of the volume in 2021.
While transaction volumes were low, there were a couple of notable highlights:
■ In September, CBRE brokered the sale of a 6.4ha block of undeveloped land adjacent to Ellerslie Racecourse, known as The Hill, for a confidential sum reported to be over $100 million.
■ In April, CBRE and Savills brokered the sale of a 105ha site in Karaka, South Auckland, to Fisher & Paykel Healthcare for $275 million – thought to be the biggest land transaction ever concluded in New Zealand.
■ Edited. Full report at oneroof.co.nz