2020 has changed the way New Zealand does business

The wider commercial market in New Zealand has not been spared by the economic implications of COVID-19 in the post lockdown environment, which has already been made apparent in sales figures seen in recent weeks/months.

A nervousness in the market has seen many investors/developers taking a “wait and see” approach, with the focus being on maintaining existing portfolios rather than further diversifying into new investments.

However, investment in commercial property is not necessarily seen as undesirable in the current climate for well established, seasoned investors. The directive of RBNZ in slashing the OCR to a record low 0.5% has meant that interest rates on borrowing have significantly decreased as a matter of course. This enables cheaper borrowing costs for commercial property, particularly for investors with lower risk profiles.

While borrowing costs may be low for investors, banks are currently much more risk-averse toward lending than they have been since the 2008 GFC, both towards new and established investors alike. In this respect, tenant strength and covenant is a key focus within lending considerations, as banks are now undertaking stringent due diligence on prospective tenants to gauge their suitability for lending purposes.

Further to the point of tightened borrowing criteria, longer-lease terms are also being seen more favourably than usual due to furthered income security from the bank’s perspective, with higher tenant equity (lower D/E ratio) also being highly regarded. Much of this lending criteria from banks was already commonplace prior to COVID-19. Still, such considerations are now being harshly enforced by banks in practice (reaffirming their risk-averse stance in the post-COVID-19 environment). This needs to be considered by buyers, sellers and intermediaries alike.

While the above may have a pessimistic ring about it, the post-COVID-19 environment also presents opportunities.

Such opportunities come in the way of proposed sale and leaseback transactions, (which many businesses who currently own their premises are considering), in order to free up capital and reduce debt levels. Such arrangements enable businesses to liquefy their capital which is otherwise invested in real estate, thus giving more flexibility to fund their core activities and strengthening their economic platform to see out the economic implications of COVID-19.

Many office-based businesses endured the COVID-19 lockdown by working from home digitally.

While the idea of working-from-home has historically been considered questionable, many businesses saw great success during this period without loss of productivity. Combining this with the rising unemployment rate in COVID-19’s aftermath will mean that vacancy rates for office space will likely rise from current record lows nationally. An exception to this will likely be Wellington due to high levels of government tenancy that underpin Wellington’s office sector.

The retail sector has seen the greatest impacts in light of COVID-19’s implications on the economy.

Decreased quarterly spending alongside the reduced movement of people and transport (between Levels 2-4) has resulted in constrained cash flow for many businesses. Supermarkets, pharmacies, and other essential services prove to be exempt from the impacts felt by the rest of the sector, but beyond these exceptions, the retail sector is reeling.

While bricks-and-mortar retail platforms have been the hardest hit, there has and will be an upswing toward industrial property for omni-retail platforms (e.g. logistics office space, online retail, distribution centres for larger-scale retailers, etc.). This is proving to be a growing area, requiring a more adaptable approach than normal as to how retail property is dealt with from a sales/leasing perspective. This aside, the current economic forecast is not particularly friendly toward buyers, sellers, or intermediaries for retail property within the foreseeable future.

In contrast to the office and retail space, the industrial sector has shown significant resilience against current market conditions (post-Level 3/4).

Growth in logistics, rural and the agribusiness sectors are key drivers behind high-demand for industrial space, leading to low vacancy rates accordingly. Supply pipelines of new developments continue to remain modest, further contributing to the shortage and overall confidence in this sector, even in the current economic climate.

While the industrial sector may feel some short-term disruption from COVID-19’s impacts, such disruption is expected to be short-lived. Industrial sectors (such as manufacturing, construction etc.) contributed up to 20% of New Zealand’s $300b economy in 2019. The sector is expected to continue to perform strongly in the short-term and remain a significant contributor to the national economy - this further highlights the resilience of industrial property in comparison to its other commercial counterparts.

Additionally, public works and infrastructure activity for shovel-ready projects are now underway in many parts of the country, injecting jobs and productivity back into an otherwise deflated national economy. In summary, while the short-to-medium term outlook for the office and retail sectors remains uncertain at best, the industrial market will continue to be an attractive investment for buyers and sellers alike in the medium to long term.