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Commercial Property Market Stalls as Uncertainty Lingers

New Zealand’s Commercial Property Market Stalls as Uncertainty Lingers Over Covid-19

RICS New Zealand Commercial Market Survey, Q1 2020

• RICS’ Occupier Sentiment Index and Investment Sentiment Index have reversed sharply from a strong position in Q4 2019
• Deterioration in sentiment among investors and occupiers caused by COVID-19 less pronounced in New Zealand than across most of the Asia Pacific
• Commercial property market growth expected to slow as many small and medium businesses face cash flow risks
• RICS calls for continued collaboration between tenants and landlords post COVID-19

The impacts of COVID-19 has stalled New Zealand’s commercial property sector, with uncertainty over the long-term impacts driving a steep decline in market confidence, the Q1 2020 RICS New Zealand Commercial Property Monitor has found.

The quarterly market survey of New Zealand commercial property professionals released today by RICS shows that demand for commercial property from both occupiers and investors has stalled to begin 2020, leading to a dive in sentiment amongst investors and occupiers over the past three months.

Market momentum as measured by the Occupier Sentiment Index (OSI) and Investment Sentiment Index (ISI) reversed sharply to start 2020, falling to -19 and -11 respectively in Q1 2020. This is indicative of a moderate pullback in momentum, however both indicators are still a way off the historically low levels recorded during and after the Global Financial Crisis.

“There has been a steep decline in the optimism of commercial property professionals in New Zealand, however while sentiment is certainly taking a hit the reaction does not appear to be as severe as it was during the depths of the GFC,” RICS Australasia Managing Director, Chris Nicholl, said.

“Sentiment has perhaps not dropped as sharply as in neighbouring markets off the back of reports of only a slight contraction in occupier demand and little change in investment demand from Q4 2019 to Q1 2020.

“The result appears to be somewhat indicative of occupiers and investors maintaining a sort of ‘holding pattern’ in Q1 given the uncertain duration of the coronavirus lockdowns.

“Although the severity of the contraction will likely depend on the length of time it takes to resolve the uncertainty in the market, what we are seeing is that commercial property could emerge in a stronger position over the medium term than other sectors of the economy.”

RICS Australasia Senior Economist, Sean Ellison, said the survey found both rents and capital values are expected to continue their steep decline over the next three months.

“Perhaps, unsurprisingly, in net balance terms the pullback in rents and capital values for retail properties are expected to be more severe than those for industrial and office properties,” Mr Ellison said.

“Prime office and industrial properties are expected to be more resilient than retail, with prime office seeing little change in rental and capital values. We are also expected to see that the spread between primary and secondary assets is expected to widen significantly.”

Mr Nicholl said ongoing support for the sector is critical as high-level social distancing restrictions now start to ease.

“The New Zealand Government’s recent announcement it will provide interest free loans for a year to small businesses impacted by COVID-19 through the Small Business Cashflow Loan Scheme is one measure that will provide immediate support for many businesses to meet their cashflow needs,” Mr Nicholl said.

“However, the commercial property sector is not out of trouble yet. There must be continued support for the sector and continued collaboration between landlords and tenants post COVID-19.”

The Q1 2020 RICS New Zealand Commercial Property Monitor can be found here.

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