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Private capital actively seeking a home

Private active capital is circulating in New Zealand at levels higher than last year according to Bayleys national director commercial and industrial, Ryan Johnson.

Johnson says with identified market runway left before interest rates markedly ease, he’s expecting continued strong enquiry and activity from both local and offshore ultra-high net worth individuals (UHNWIs) and family office buyers.

“Well-capitalised private investors were the most active global real estate buyers for the third consecutive year according to our international real estate partner, Knight Frank’s 2024 edition of The Wealth Report.

“Knight Frank found almost a fifth of UHNWIs planned to invest in commercial real estate in the next 12 months, with Asia-Pacific identified as the world’s newest wealth hub – a trend confirmed when Bayleys recently took a delegation to Australia and Southeast Asia to promote commercial property and business opportunities.”

Johnson says New Zealand remains a high-performing and attractive destination for global private and family office wealth, particularly as there’s an opportunity to buy ahead of the next real estate cycle with arguably greater value to be realised and less market competition.

“While Chinese capital is currently less active in the New Zealand market, Singaporean capital is expected to become more inquisitive as yields hit around seven to eight percent which is currently where the all-in cost of debt is hovering.

“Heightened geopolitical risk around the world is driving UHNWIs and family office buyers towards New Zealand where returns are less volatile, and there’s a potential pathway to residency if certain thresholds are met.”

In line with global activity, private investors took a record share of overall commercial property transactions in Australia last year, says national head of capital markets for Knight Frank Australia, Justin Bond.

With Australian property markets generally subdued off the back of a softer economy where higher mortgage interest rates have impacted disposable incomes and household spending, Bond expects some improvement in the second half of the year along with a further decline in inflation.

“The Reserve Bank of Australia is currently trying to balance downside risks to growth with the need to maintain downward pressure on inflation. The current cash rate of 4.35 percent looks likely to endure until at least late in the year.”

Bond says with reduced institutional and cross-border transactional activity, well-resourced private investors with less reliance on debt have been opportunistic in the commercial real estate market, with the smaller markets of Brisbane and Perth currently outperforming Sydney and Melbourne.

“Private investors have positioned themselves to benefit from the early stages of recovery, which we believe will soon start to emerge in Australia,” he explains.

“The investor base will gradually normalise as offshore investors and domestic institutions return, but this process will take time and private investors will continue to take significant market share.

“In recent months we’ve started to see more interest from Singaporean investors, who typically form a large part of the Australian market, and this is a sign that institutional capital is returning to acquisition mode.”

Strategically, Bond says investors are seeking greater diversification into alternative sectors with the living sectors at the front of the queue, led by build-to-rent but also encompassing co-living, student accommodation and retirement living.

“This partly reflects a preference for more defensive strategies at this point in the real estate cycle, but is also due to structural under-supply in rental markets and the ability to adjust rental income streams more quickly than other sectors in response to high inflation.”

Having a close neighbourly relationship, Bond says it’s a natural step for Australia-based investors to also consider investment options in New Zealand.

“It’s not a matter of one market being better than the other as the markets are very similar, but the cycles can be different and offer good buying opportunities at different times, so it pays to cast the net wider than just one city or one country.”

Until the market starts to see interest rate cuts and institutional investor activity rebounds, private capital is expected to persist as a driving force in the commercial real estate market in the higher-for-longer interest rate environment says Neil Brookes, partner and global head of capital markets for Knight Frank Asia Pacific.

“Revisions to the interest rate outlook due to delays in interest rate cuts and geopolitical uncertainty mean that overall investment volumes remain subdued.

“As inflation eases further and rate cuts eventually come into place towards the end of the year, pressure will be easing.”

Brookes says signs of a recovery and improvement in activity can already be observed with the seller-buyer price gap narrowing, and more investors striving to get deals done perceiving the current period to be the opportune time to hunt for under-valued assets with increased exposure to alternative asset classes noted.

“UHNWIs and family offices have been reviewing their investment strategies in the face of higher cost of capital and differentiated returns from non-traditional asset classes. More are turning their attention towards real estate which offers the potential for higher non-correlated returns, diversification benefits and better inflation hedge through stable rental income and long-term capital appreciation.

“Knight Frank’s The Wealth Report 2024 shows that 19 percent of UHNWIs plan to invest in commercial real estate in 2024.

“Following a beds, sheds, eds and meds theme for the year ahead, we predict logistics and the living sectors to be the top two outbound sectors of interest by US investors, followed by retail, office and hotel.”

When asked what New Zealand can offer to global active private capital, Brookes says net migration-driven higher population growth and a returning city centre workforce indicate that New Zealand is well positioned for increased investment.

This article first appeared in Bayleys’ Total Property portfolio.

Read the full version here.

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