18 Nov 2024
As we approach the end of the calendar year, we can view 2024 as a year in which cautious optimism has been rewarded. High inflation and interest rates have marked the economic environment over the last few years, creating uncertainty. However, as this year has progressed, encouraging signs of positive change began to emerge. These dynamics are opening doors to new growth opportunities as we move into 2025.
In October, the Reserve Bank of New Zealand (RBNZ) lowered the Official Cash Rate (OCR) by 0.50% to 4.75%, with further reductions anticipated, potentially down to around 3.25% by the end of 2025. This trend reflects the RBNZ’s response to a cooling inflation rate, now within the target range of 1-3%, and its goal to stimulate economic growth. As the OCR continues to reduce, we can expect term deposit savers to be affected with reduced returns, with the average deposit rate* for 12 months or more now sitting at 4.69%, leaving a net return of just 3.37% for those in a term PIE (if on a 28% prescribed investor rate).
In contrast, PMG’s retail funds have delivered an average gross cash return of 5.16% and net cash returns of 4.42% over the past six months (acknowledging the difference in asset class and risk profile). That said, we know our investors value regular monthly cash returns and growth over time. With interest rates expected to decline further into 2025, this return gap may widen, making commercial property an increasingly attractive option for long-term investors seeking regular income.
Moreover, inflation, which was a major concern at the beginning of the year, eased significantly, from 7% down to 2.2%, creating a more stable economic outlook. While households are still contending with high living costs, this downward trend in inflation is promising for the economy and the real estate sector. Coupled with falling interest rates, the property market appears to be approaching the bottom of its cycle, with property valuations likely to strengthen in the coming years. This trend suggests favourable conditions for those considering commercial property funds as a source of regular returns and growth in value over the long term.
Opportunities in commercial property investment
Our transition from standalone syndications to a diversified funds management model has proven beneficial, reducing risk, and enhancing income resilience during economic headwinds. A broad portfolio spanning various geographies, sectors, and property types allows our funds the flexibility to adapt and grow in different market conditions.
With falling interest rates and stable inflation, 2025 is likely to offer growth opportunities in New Zealand’s commercial real estate market. Our strategy combines a well-positioned portfolio with conservative borrowing and proactive interest rate hedging, allowing us to make strategic acquisitions at favourable values while maintaining strong fund performance.
Looking ahead, PMG is committed to proactive asset management and value-add initiatives, which we believe will position our commercial property funds for long-term value growth in an evolving economic market. As the New Zealand commercial property market shifts from correction to growth, declining interest rates are expected to drive profitability, increase property values, and enhance potential investor returns.
If you are interested in learning more about PMG’s commercial real estate funds and how they could fit into your investment strategy, please do not hesitate to contact us. Our team would be pleased to discuss how commercial property can deliver regular income and growth potential in today’s market.
*Straight line average of the 1 year to 5-year term deposit rates as at September 2024.
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Disclaimer: The information in this article is of a general nature and was current as at 18 November 2024. It is not intended to be regulated financial advice for the purpose of the Financial Markets Conduct Act 2013, and does not take your individual circumstances and financial situation into account. PMG does not provide financial advice on whether or not an investment in one of its funds is right for you. Please seek advice from a licensed financial advice provider before making any investment decisions.
