Reserve Bank says a wave of new supply could exert "significant downward pressure" on commercial property prices

Reserve Bank says a wave of new supply could exert "significant downward pressure" on commercial property prices

The Reserve Bank has warned that the risk of a downturn in the commercial property market may be increasing.

"Commercial property prices continue to increase, with growth spreading from the prime to the secondary sub-sector," the Reserve Bank said in its latest Financial Stability Report, released yesterday.

"Price growth has been driven by strong tenant demand pushing down vacancy rates, particularly in the retail sector, and investor demand attracted by the high return on commercial property relative to low global interest rates.

"This is consistent with the trend in commercial property markets internationally, where investors' search for yield has contributed to strong growth in capital values in a range of countries," the report said.

But it also warned there could be rough seas ahead.

"Despite strong returns, the risk of a downturn may be increasing," the report said.

"Rising prices have driven the commercial property price-to-rent ratio back to pre-crisis highs.

"In line with rising prices, bank lending to the sector grew by 9.3% in the year to March 2016.

"Nevertheless, the sector's debt-to-income ratio remains relatively contained compared to levels reached during the GFC, helping to reduce financial stability risks," it said.

However a wave of new supply was about to wash over the sector.

"Although vacancy rates continue to decline, particularly in the retail sector, a strong supply response is under way and rental growth is slowing," the report said..

"Nearly one million square metres of commercial property space was developed in 2015, a threefold increase on 2014, and more than 1.5 million square metres is forecast for this year.

"The expected increase in supply is particularly strong in the industrial sector, which is forecast to add nearly 9% to the existing stock in 2016 alone.

"This supply could exert significant downward pressure on prices when it comes on stream," the report concluded.

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8 Comments

I'm picking he's talking about the major centers. The regions have plenty of vacant commercial properties. Interestingly many of them are owned by investors based in the major centers, and one i looked at a few years ago was priced like it st in Auckland or Wellington. When I looked at the figures, they clearly ignored the fact that it had been empty for the previous five years. They wouldn't negotiate so i didn't buy.

depends what you are talking industrial or retail.
certain areas of Auckland are restricted by available land, unless you want to tear down and rebuild

both retail and industrial usually.

It's just a natural progression in major centres. Any price changes create commercial opportunities. Also commercial properties are expected to be run like a business unlike residential that runs similar to a pump and dump.

The risk of a downturn has always been there. It's just with commercial property there tends to be long leases that led to the construction. Maybe RBNZ should have a bit more contact with the outside world, it would provide a good opportunity to develop some social skills.

It is inevitable that a commercial property crash will happen.Every time I pick up the paper there is news of a new Industrial Hub being built somewhere.Oversupply is coming.

Lets not beat about the bush here , ALL asset classes are at risk, from a prolonged cycle of low interest rates which has seen the prices go sky-high

Quite simply people have been chasing yields they cannot get from the banks , and all other asset prices have gone up , particularly stocks and shares , property and to a lesser extent bonds and gilts which have a relationship in sync with interest rates .

Auckland property is significantly more overvalued than shares. The S+P500 has a current P/E ratio of 24. Looking at price/rent in Auckland gives number 30-50 depending on the property.

The 'sky high' equity price that would have been a stretched valuation this time last year, is today's desirable high yielding stock as conventional equities valuation metrics such as PE ratios undergoing a shift in response to low interest rates. The price correction risk you write of would have to come from a rise in interest rates ( setting aside speculative over investment or an economic event). If you think that risk currently exists then you must believe interest rates are soon on the up?