As spring beckons, we are greeted with the news that, after a lengthy wait, the OCR is finally moving downwards. The lack luster performance in the economy, with low GDP and rising unemployment, coupled with falling inflation has been the catalyst for change. Finally, there will start to be an easing of pressure on households as the cost of money falls thereby providing more money in house owners back pockets. While time is needed for there to be any material change for borrowers it does tend to have a more immediate effect on sentiment. The major banks had moved ahead of the RBNZ and the impact on longerterm fixed rates, both Commercial and Residential, has been quite significant. This should help stimulate demand and it remains a great time to buy.
Already there is a sense across this office that investor inquiry has improved. This is likely because deposit rates are also dropping. Cashed up investors, previously happy to leave money in the bank with gross returns more than six percent, are now looking to redeploy the cash. Deposit rates are likely to trend towards five percent or less in the coming months. The smart thing might be to move now while there are still low levels of competition. We are also happy to say this increased investor demand coincides with access to better quality stock.
Bank deposit returns have been our biggest competition in the past two years with property returns not perceived to be high enough for the increased risk (over money in the bank). Since our last newsletter there has continued to be strong leasing and sales activity (see over the page). There has still been particularly good demand for industrial properties and steady inquiry on offices too. Sales have been spread between investors and owner occupiers. Industrial rental rates appear to have levelled off on the back of slightly increased vacancy rates. As the economy has tightened some tenants have been motivated to save money. This has resulted in them either downsizing or in some cases even retrenching back home. Office rentals for the best accommodation by contrast look to be increasing slightly. This is largely driven by the indicative rents for new buildings. A big gap has opened up between quality existing rentals and new build rates.
As a result, new building is still subdued but a shift in interest rates could help to stimulate that. Hamilton continues to benefit from inflows of migration and the likelihood is this will put pressure on supply in the medium term.
One other notable thing in the last quarter has been the release of the new HCC long-term plan and their role out of significantly higher annual rates (increased in 24/25 by around 16.5%). This is driven principally out of a shortfall in infrastructure spend. The lingering question, given these are principally passed on to commercial and industrial tenants, is what impact this may have medium term on net rental rates given the higher total occupancy costs. As always, preservation of good tenants remains a sensible strategy for landlords.
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