2018 was a turbulent year for the globa 1 economy, resulting in the worst year for global stock markets since the Global Financial Crisis. Four US Federal Reserve rate hikes, trade wars, uneven global growth, an increasingly fragile Chinese economy, emerging market stress, Brexit, surging and tumbling oil prices, flattening yield curves and Italian debt concerns put an end to a prolonged period
of calm in global financial markets. In an era where rising asset prices have been predicated on loose monetary policy and calm financial conditions, there was a distinct change in tone over 2018.
On the asset front, the most notable change was the sharp decline in equity markets that escalated towards the end of the year. However,
at this point in time, there
is no consensus on whether or not we simply observed
a period of correction in an aging bull market, or whether it's the start of something more severe.
New Zealand Economy
In New Zealand, we also had our own idiosyncrasies to deal with. Business confidence, which fell following the 2017 General Election, stayed low and appears
to have impacted on economic activity over the second half of 2018. Then there were the regulatory and legislative changes (foreign ownership restrictions and tax policy) impacting the property market. These changes have had consequences for both residential and commercial property. Over 2018 we saw the Reserve Bank of New Zealand Loan-toValue ratio (LVR} restrictions ease; the first Kiwibuild homes sold; the Bright Line test extended to 5 years; the removal of letting fees; a further easing of LVRs in January
2019; foreigners banned from buying existing residential properties; the Tax Working Group released its preliminary findings that suggest support for a capital gains tax; and the government introducing the Healthy Homes Guarantee Bill. That's a lot of change for a market in one year.
Impact on commercial real estate
The key takeaway for commercial property
is that increasing regulatory and compliance requirements have added additional complexities and costs to the sale process. The potential for tax changes in 2019 means this trend is likely to continue into 2019.
However, outside of this, commercial property had a respectable 2018. In part, that reflects the fact that despite all the risk, uncertainty and volatility, New Zealand weathered the 2018 storm relatively well. The labour market continued to tighten with the unemployment rate hitting a 10-year low. Many export sectors had a strong year and consumption held up OK, even with wallets getting a petrol pricerelated squeeze. Underlying inflation pressures showed some vague signs of life and strong population growth, low interest rates and high levels of tourism remained key economic supports.
Despite the changing market, commercial sales values tracked to hit a new record high in 2018. Key market supports include strong tenant demand and therefore increasing rents, as well as still-low interest rates. Strong tenant demand is reflected in the low vacancy rates. For example, industrial vacancy rates in Auckland over the year toAugust 2018 fell to just 1.7% from 2.2% in February 2018. Land availability and cost is a constraining factor
in bringing more industrial supply to market, particularly in Auckland, and should continue to support prices in the sector. And, with official interest rates expected to remain low well into 2020, we expect industrial property demand to remain resilient going forward.
The office sector also enjoyed a buoyant 2018. However, the sector is undergoing a transformation with a growing demand for co-working spaces. Changing preferences have seen co-working space in Auckland grow from 1400sqm in 2011, to 28000sqm by 2017. Although still a relatively small share of the overall market, the sharp growth rates and emergence of large established companies looking into co-working options suggests that this trend will stick around for a while longer. For example, over 2018, an additional 14500sqm of space was estimated to have been brought to market.
Retail, on the other hand, is facing ongoing challenges. The growth of e-commerce continues to put pressure on bricks and mortar margins. Going forward, location will become increasingly important. New trends also emerged in 2018, including NZ's first ever ghost restaurant- selling food solely through Uber Eats. The evolution of preferences
and technological advancements are likely to continue to shape the retail space over 2019 and beyond which will present both challenges and opportunities in the sector.
2019 market forecast and trends
Overall, 2019 is shaping up to be an extension of 2018. Global threats will remain, yet the New Zealand economy is expected to stay resilient. But with the Official Cash Rate (OCR} expected to remain on hold through to 2020, tenant demand likely to remain solid and continued respectable yields (especially in relation to other asset yields}, the signs are pointing to another respectable year for commercial property in New Zealand.
By Kim Mundy, Economist, ASB