Key findings
- The New Zealand commercial property market is facing similar headwinds to those affecting other countries. The shift towards working from home during the pandemic has been less persistent, but online retailing has become relatively embedded.
- Property values have fallen from their peak over the past couple of years, primarily reflecting higher interest rates. Tenancy demand and rental growth has been divergent across subsectors:
- A flight to quality in the office sector has contributed to a rise in vacancies in lower quality office buildings and weaker rent growth, while prime office properties have performed well.
- The growth of online shopping and generally soft consumer spending are creating challenging market conditions for the retail sector, affecting rental growth.
- Industrial sector rents have been relatively strong as supply continues to be constrained by land availability, while demand has remained robust.
- New Zealand’s financial system has become more resilient since the global financial crisis (GFC), including to risks from the commercial property sector. Lenders are less exposed to commercial property than prior to the GFC, particularly in relation to property development. In addition, higher lending standards have built up greater resilience in the sector over recent years.
- Banks need to remain vigilant and continue to monitor developments in the commercial property market, particularly given the range of challenges and risks affecting large parts of the economy and the financial system. We will continue to monitor financial stability risks arising from commercial property exposures.
Why we did this research
- Historically, the commercial property sector has been sensitive to economic activity and can amplify financial sector impacts from economic downturns. A significant deterioration in the sector can impact financial stability through banks’ and other lenders’ exposure to the sector.
- Global property markets are currently facing significant headwinds from high interest rates and longer-term trends like working from home and online shopping. The impact of these headwinds on financial systems has been contained so far, although some overseas lenders with a concentrated exposure to the sector are facing difficulties.
