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Easing border restrictions will open the door for foreign property investors

More transactions like the $43.4 million sale of Kelston Mall to a Singaporean investor are expected when borders are reopened to foreigners.

“Rest assured, once borders loosen up, the off-shore capital that has been itching to transact will be back, and actively hunting for opportunities,” says Bayleys national director commercial and industrial Ryan Johnson.

He says foreign purchasers have largely been shut out by border restrictions and the constraints these impose on undertaking due diligence on larger scale property transactions.

“Should these restrictions be eased in the second quarter of next year as planned by the Government, then we would expect a significant increase in interest from offshore investors and an associated movement of foreign capital back into our commercial and industrial property market. This should benefit the office and hotel sectors in particular, which have faced considerable upheaval as result of COVID-19.”

Johnson says a report by Bayleys’ global partner Knight Frank is predicting real estate investment volumes in the Asia Pacific will grow by a third in 2022. Knight Frank’s annual Active Capital report, now in its sixth year, uses data and proprietary modelling to predict global real estate investment trends for the year ahead.

Office buildings remain a stalwart investment at the high value end of the market with this sector forecast to attract over half of inbound investment into the Asia Pacific region in 2022, according to the latest Active Capital report. Industrial will be the second most invested sector, with retail remaining third despite the challenges it faces.

The two top sources of cross border property investment in the Asia Pacific are the US and Singapore, says Knight Frank. Singapore just nudged out the US for the top spot in the first half of 2021 led by massive offshore investment by Singapore government linked companies.

Singaporeans and Australians are likely to be the most active foreign investors in New Zealand next year, says Ryan Johnson. “They were active here just before the borders shut down, buying a number of larger assets that we were selling, including the Kelston Mall in Glen Eden for $43.4 million and a retail offering in the Wynyard Quarter. We expect that interest to be rekindled once they are able to fly into the country again, particularly amongst Singaporeans who already own large property assets in New Zealand.”

Johnson says the depth and breadth of domestic demand for higher value commercial and industrial property this year has been unexpected and eye-opening. Bayleys has already exceeded its best previous year for sales over $20 million, with an analysis showing 88 per cent of those were generated within New Zealand.

“Low mortgage rates have been a big driver of this demand but that’s changing with interest rates now on the rise, and expected to increase further next year, and lending criteria also tightening.

“The market will therefore benefit from the return of offshore investors and the additional competition for properties that they provide. Some of them also source their funding offshore and aren’t so affected by what’s happening with interest rates here.”

Johnson says the escalating cost of debt, along with the significant increases in land and construction costs, is going to lead to fundamental changes across many real estate metrics next year.

“This will inevitably lead to repricing across all subsets of the property market and we will see a reset in decisions around balance sheets and recycling capital.

“Rentals on new builds will also have to increase to reflect the additional costs incurred in their development. Historically, this has pulled up rentals on existing premises which will be a positive for investors.”

Johnson says digital disruption, which has been hugely accelerated by COVID and is changing the way we we work, spend and socialise, will continue to be a factor in 2022.

“Ecommerce technology trends that might have taken five to seven years to develop have happened within 12 to 18 months and have gone right through to supply chain processes, warehouse automation, manufacturing and micro-fulfilment centres.”

Scott Campbell, Bayleys national director industrial and logistics, says ecommerce growth will also continue to put pressure on businesses to have enough storage or warehousing space to facilitate online orders. “That will impact both big logistics providers and retailers and we may see some existing retail footprints change into ‘last mile delivery’ centres.”

Low vacancy rates across most of the country has meant industrial property has become the asset class of choice for many investors and that is unlikely to change any time soon, says Campbell.

“COVID has delayed a lot of developments particularly in Auckland which has been exacerbated by the most recent Delta strain lockdowns. This means pent-up leasing demand will be a continuing factor in the industrial market for some time to come, keeping vacancy rates lows.”

Steve Rendall, Bayleys national director office leasing and advisory, says there has been significantly less focus this year on office occupancy costs than might have been expected after 2020 because of the strong performance of the economy.

“One of the interesting things we’ve seen through 2021 – against many predictions – has been the re-emergence of the office as critical infrastructure for any organisation looking to build culture, provide a platform for efficient communication and to train team members.”

“The other key trends we’ve seen from businesses in 2021, and which will gather further momentum in 2022 and beyond, are an increased focus on carbon reduction, digital transformation and staff wellness.”

Rendall says all these trends provide opportunities for new-build developers who can meet changing organisational requirements.

However, that comes with a more sophisticated focus on what matters to each organisation, Rendall says. Tenants are seeking out the best locations that deliver in areas like transport solutions, safety and amenity for the team.

A Singapore based investor paid $13.2 million for retail complexes on the ground floor of two new apartment buildings in the Wynyard Quarter.

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