Welcome to First Light Capital’s summer market update February market update

Firstly, the team at First Light Capital would like to say that our thoughts are with all those who’ve been affected by the unprecedented flooding across the North Island over the past week. The scale of the impact is remarkable, and we hope everyone that’s been caught up in it recovers as soon as possible.

Towards the end of last year, the short-term economic outlook wasn’t exactly rosy. But as we’ve rounded into 2023, there are positive signs of renewed optimism in the global economy.

There are a range of favourable factors in the A-grade commercial property market, and while it’s safest to exercise caution, it’s certainly not doom and gloom like some may have predicted.

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Top-line commercial property metrics

Many factors that underlie the commercial property market are positive from an owner/investor point of view.

Colliers research predicts historically low vacancy rates will continue, rental levels will continue to rise at an elevated pace, and demand for high level office space will remain high. The high cost of debt is still prohibitive for many, but these important metrics give good cause for investor confidence.

Transaction volumes in 2022 were down considerably, with a huge gap between vendors and buyers. Buyers with capital who can stomach higher interest rates (at least for a time) have a fantastic opportunity to make investments that will be lucrative in the long term.

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New Zealand economy

New Zealand tends to be more of a follower of global markets, so our current situation is slightly different. Business confidence and the housing market are at multi-year lows, and the effect of a string of RBNZ hikes have kept the pressure up. Not to mention it’s an election year, which always comes with some uncertainty.

But there are positive signs that relief is on the way. OCR stability, an increase in overseas tourists, students and workers and the potential reinstatement of interest deductibility are all causes for optimism. China’s reopening offers hope for easing supply chain restraints, though there are mixed forecasts for what effect it will have.

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Global economy

Data out of the US, Canada and Europe all points to a slowing in CPI rates, which is good news for borrowers. US interest rates rose at their fastest pace in decades last year, but central banks are starting to ease off their aggressive hiking regimes.

As an example, after four consecutive 75 basis point hikes, the Fed moved to a 50 basis point hike in December, and a 25 basis point hike this week.

Equity markets in Asia and Europe have started off the year positively. Most of Asia is expected to avoid the recession completely, with markets now pricing in more of a soft recession globally.

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Outlook ahead

2022 was not an easy year, and it would be overly optimistic to expect a dramatic turnaround in 2023.

In times of uncertainty, the flight to quality prevails. Good buildings in good locations with strong tenants and rental growth are always key points to consider and are especially so right now.

Ultimately, property investment should always be approached through a long-term lens. There may still be some short-term pain, but key global economic indicators suggest that the tide may be turning and the outlook beyond the short term period is better than what was forecast last year.

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