Article:

Will COVID-19 Impact Commercial Property Values?

16 June 2020

New Zealand’s commercial real estate has been a seller’s market for years, but has it been affected by the COVID-19 pandemic and New Zealand’s Alert Level 4 lockdown? Certainly, commercial landlords, property managers, and property owners will feel the strain of the economic fallout, but the need to buy and sell commercial properties in New Zealand will continue to generate opportunities.

At all BDO accounting firms, our first concern is and will continue to be the health and safety of our fellow New Zealanders. We’re closely monitoring the impact that COVID-19 has had on New Zealand’s commercial property market. Learn more below.

 

How has the commercial sector been impacted by COVID-19?

Different hubs of New Zealand’s commercial sector have been impacted by varying degrees of severity. Hospitality and tourism businesses have been among the hardest hit, owing to New Zealand’s shuttered borders and strict travel restrictions. On the other hand, office-based businesses have largely been able to survive thanks to the potential for remote work but have faced a range of burdensome administrative costs on top of diminished consumer activity.

Meanwhile, warehousing and logistics businesses have faced limited headwinds, as many retail businesses were forced to operate via e-commerce and essential services continued to operate with higher demand. Take altogether, the COVID-19 pandemic paints an uneven picture for economists to forecast the future of commercial property. However, these economic trends have historically been key indicators for commercial property market performance.

 

How has the commercial property market been affected thus far?

Commercial properties are valuated based on future cashflow as forecasted at the time of valuation. This suggests that the sudden, forced contraction of the New Zealand economy will prove a drag on commercial real estate values, at least in the short term.

Furthermore, only time will tell if any trends that have evolved during this pandemic will remain permanently. Many businesses that developed work-from-home procedures during the lockdown may determine that a permanent contingent of remote workers limits the expenses incurred by their offices and delays the need to expand.

 

Projections for the future of New Zealand property values

Fortunately, the economic fallout from the COVID-19 pandemic has differed from past slowdowns and recessions in that the root causes of the downturn weren’t economic in nature. Unlike the Global Financial Crisis (GFC) of 2008, which had its roots in the real estate market, the pandemic upended a period of widespread economic optimism. This bodes well for an accelerated recovery, though nothing is guaranteed. Early indications are that consumer confidence, which had dipped to GFC levels, is already on the rise, suggesting the commercial sector will begin to recover as New Zealand eases out of lockdown restrictions.

However, many small businesses may yet fail, resulting in a surge of property availabilities, vacancies, and a difficult re-leasing environment. Early projections indicate a more buyer-friendly commercial property market in the near future, with the all-time low official cash rate locked in for the next year. This should result in sustained interest in buyers, but real estate owners may feel this strain in the market.

The commercial real estate market may also weigh tenant risk assessments differently moving forward, as essential services providers now assume a higher level of assumed liquidity stability than they may previously have had.

 

BDO’s Business Advisers are the Ideal Partners

The valuation of property in the construction and real estate industry in New Zealand will be historically unpredictable in the coming months, as the country emerges cautiously from an unprecedented global phenomenon. In such a turbulent market, a conservative approach is crucial. Plan your steps carefully and consult with the construction and real estate professionals at BDO. Our experienced business advisers empower our clients with insight and expertise acquired from years of productive relationships with industry professionals.

 

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