Prime office and industrial properties in Auckland continue to represent good value despite the global economic impacts of Covid-19, according to a new regional analysis of Asia Pacific markets.
The report from Colliers International – titled Asia Pacific Real Estate: Still Good Value in a Changed World – compared property yields with other asset classes.
It found low or negative yields on government bonds continue to make property yields more attractive in Asia Pacific’s developed markets, including Auckland.
Richard Kirke, International Sales Director with Colliers’ New Zealand Capital Markets team, says two key factors are impacting the values of Asia Pacific investment assets in general.
“The first factor is the recession caused by Covid-19, which could peak in Asia Pacific during the second half of 2020.
“The second is record low interest rates – the result of a decade of loose monetary policy and recent emergency rate reductions.”
Kirke says most Asia Pacific markets will record negative real GDP growth in 2020.
“However, although uncertainty is high, the recovery that is already starting in China should spread gradually to the rest of Asia Pacific over the second half of 2020, with a sharp rebound in growth likely in 2021.
“With China now the world’s largest economy on a purchasing power parity basis, it has the potential to pull not only the region but the world out of recession.
“Another silver lining to the Covid-19 recession is that recovery should not push up interest rates.
“Over the past year, central banks in Asia Pacific have either held policy short-term interest rates at already low levels or reduced them further, including New Zealand.
“At the same time, interest rates are significantly higher in Asia Pacific’s emerging markets. As a result, developed property markets such as New Zealand look safer than emerging markets in the present environment.”
Ian Little, Associate Director of Research at Colliers New Zealand, says very low interest rates in Asia Pacific’s developed markets have pushed up bond prices.
“This reduces bond yields, reduces the risk-free rate used in the capital asset pricing model of equity values, and moderates upward pressure on the capitalisation rates used in commercial property.
“Compared to low or negative yields on government bonds – and the possibility of falling dividend yields for equity markets – the yields offered by real estate assets in Asia Pacific markets look attractive.”
In the premium office sector, Auckland has among the highest yields in the region with average yields at 5.8 per cent which provides an attractive yield spread of approximately 5.0 percentage points when compared with the risk-free alternative of New Zealand 10-year government bonds. This is the highest in the 10 major APAC cities tracked by Colliers International.
Auckland’s logistics and industrial sector is also attractive, with yields of 5.6 per cent, compared with a yield spread over 10-year government bonds of 4.8 percentage points.“These property yields remain attractive to global investors given the relative affordability of prime office and industrial stock compared with the larger developed Asia Pacific markets.”