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Year ahead for commercial and industrial sector

Improved deal volumes and values in the commercial and industrial property market are tipped for 2024, as more encouraging economic indicators and a lack of forward new-build pipeline to address any pent-up demand start to have an impact.

Bayleys national director commercial and industrial, Ryan Johnson said Bayleys’ sales figures picked up month-on-month as 2023 progressed, with December its biggest month all year.

In the latest Bayleys Total Property portfolio, Johnson said the firm’s sales data is a good reflection of the general market due to the sheer number of deals it transacts and he expects to see more vendors and buyers deciding to act in 2024.

“Despite the sector as a whole witnessing a 31-year trough in 2023 according to CoreLogic’s national agency dashboard, an upswing in activity over the next 12 months is anticipated and this is supported by cyclical trends.

“Historically, in years where there was more than a 20-percent drop in sales volumes, market recovery was seen around one to three years later.

“Wholesale interest rates are dropping, and market interest rates will drop, too, albeit not as much as our vendors would like so I do expect to see some market repricing across all commercial and industrial segments through 2024.”

Johnson said with the cost of debt-yield spread remaining sticky, “scraping by” will not be a feasible strategy for many commercial and industrial asset owners as banks re-examine debt servicing, interest times cover and loan-to-value ratios.

On the flip side, Johnson describes leasing activity as “going off the charts” as occupiers reconcile having property of the right quality, the right scale and in the right location – especially in the office sector as return-to-work directives gain traction.

“That said, I suspect we will see some tapering off of rental growth across all sectors, particularly in the secondary-grade market, so landlords should brace for more subdued net-effective returns.”

Bayleys national director industrial, Scott Campbell said some levelling out in the industrial investment market in the next 3-6 months is expected, despite potential interest rate easing.

“Consumer spend is dampened, unemployment is rising, and there are signs that rental growth may slow this year – however, the industrial sector won’t go backwards.

“With pandemic supply chain issues now largely resolved, demand for “just-in-case” space has waned but New Zealand, and in particular Auckland, still needs more industrial warehousing and logistics capacity and high net migration gains also support this.”

The return of corporate and tour group business, encouraging international visitor numbers, and growing occupancy levels suggest the outlook is promising for the hotels, tourism and leisure (HTL) sector in 2024.

New Zealand’s small accommodation industry relative to international levels means there’s always limited opportunity to purchase quality stock, especially hotels, said Bayleys national director HTL, Wayne Keene.

“There was only one on-market hotel sale nationwide last year, with Bayleys selling Nugget Point Hotel, Queenstown. There’s good appetite from local and offshore investors for larger hotel assets and freehold going concern assets in the sub-$15 million brackets – securing the stock for sale is the challenge.

Keene said sustainability and corporate responsibility remain high on buyer, customer, and lender agendas, however we also need to pay more attention to New Zealand’s ageing room inventory across the motel and hotel market segments.

Subdued consumer spending hovers over the retail sector, with Bayleys national director retail Chris Beasleigh saying food and beverage spending is notably down, bigger purchases are being put on hold and retail margins are being compressed.

“Developers and purchasers of retail assets are still looking for more guidance and surety from the Reserve Bank and from lenders, and monitoring consumer spending data for glimmers of positivity.

“While the development pipeline has largely paused until some of the core fundamentals come back into line, encouraging net migration inflows could fuel an uptick in new retail space over the next few years.

“Regardless of market cycles, the retail sector always has a fair bit of churn, but now landlords are also under pressure to get decent returns on their investments and do not want to see vacancies.”

Given the National-led coalition is seen to provide a more supportive environment for business and the wider economy, national directors of Bayleys Business William Cheong and James MacMillan said buyers now have more confidence to re-enter the market and business owners have a much-improved environment to get their businesses sold.

“These factors will help close the gap between buyer expectations and valuations, so we expect transaction numbers to be significantly higher through 2024,” said Cheong.

“Although valuations in a lot of sectors have come down over the past 12-24 months and there are an increasing number of motivated vendors looking to exit their businesses, competition for good businesses has already strengthened which we expect will drive higher valuations this year.”

MacMillan went on to say It is also important to note that with increased competition, buyer incentives could fall away.

“Deal mechanics such as earn outs and vendor finance, used by buyers to improve returns and mitigate risks, will become harder and harder to negotiate.”

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