We hope your year has started well. What a start it has been and sadly, mostly for the wrong reasons. Our thoughts and support go out to those that have lost property and life over the recent big weather events. Northland, Auckland, Gisborne and Hawkes Bay have had to deal with horrific devastation and we hope most will recover from it. The downstream effect will however be a real shot in the arm for the entire construction related industry but it will likely add fuel to the run away inflation situation.
This week the Reserve Bank announced another 50bp hike in the OCR taking the level to 4.75%. This is the highest rate we have seen since around 2009 in that post GFC era. The implications will be further hikes in lending rates and particularly in the floating rates. One positive in this space over the last couple of weeks has been to see some stability in the longer-term fixed rates. ASB’s lowest home mortgage rate currently is their 5-year rate. The positive effect is twofold. Firstly, the signal that they are seeing things at or near the top of this interest rate cycle. Secondly that people looking for certainty can purchase and lock in rates for the long term “derisking” their position creating a worst case scenario if you like. First home buyers have certainly been much more evident since the new year and that can only be positive.
In the Commercial and Industrial sector there are two clear trends emerging. Firstly, is the increase in listing numbers. Previously this trend had been more isolated to the retail and office sectors but in 2023 this has become more apparent in the industrial sector also. The other trend is the erosion in capitalization rates obviously having a detrimental effect on capital values. While it is impossible to apply a blanket discount there is evidence that the good properties have crept 0.5-1.0% while less desirable properties are as much as 2%. Even putting the cost of funds to one side we are still hearing that access to funding remains a problem. On a positive note, the cost of replacement remains high. This should put a ceiling on the volume of stock available (as new developments become increasing less viable) and ensure on-going rental growth. Widespread business failure would however change that. Some vendors may be asking how they can stand out from the crowd. Given that residential trends always lead commercial, it has been obvious that the strategy of low or no price is key. An overpriced listing is a real killer in a falling market so listen to your preferred agent particularly about method of sale. Well priced listings engender competition and non-priced options (auction/tender/deadline sale) engender urgency while allowing the purchaser to form their impression of value. There is still good success happening with vendors adopting these strategies. We are also hearing about large scale redundancies for the first time in a long time or alternatively situations where if staff leave they are not being replaced. We view a bit of unemployment as a positive thing in allowing employers to pick up better caliber staff and improve productivity and margins in a period where margin erosion (based on higher input costs) has been evident. Our thinking is that some short term pain is likely to result in longer term gain for many sectors. As always, we are here to assist with your commercial and property needs. Be that in the leasing or sales sphere, body corporate management or simply in an advisory role. We value the relationships we have are always willing to help.