Call for realistic investment strategies

A longer-than-normal commercial property cycle has moved firmly into extra time and investors should revisit their late-cycle strategies to remain successful, a leading industry figure says.

Ryan Johnson, national director commercial and industrial at Bayleys Real Estate, said that with the Reserve Bank cutting interest rates to all-time lows amid mounting concerns over global growth, astute investors in commercial and industrial property were adjusting their strategies and expectations for a low-rate, lowergrowth environment.

In its latest Active Capital report, Bayleys’ global partner Knight Frank identified the approach of an inevitable end to an extended economic and property cycle as one of the key themes that will shape the next phase of real estate investment.

It pointed to extended runs of growth across developed economies including the UK and the US, whose current economic cycle of over nine years is double the average length of the previous 33 cycles. In Australia, the run of national GDP growth has extended for 27 years, a record among developed economies

“New Zealand is now into its ninth year of growth following the GFC. As with much of the industrialised world, the low-interest-rate environment post the global financial crisis (GFC) looks set to remain in play for an extended period here, and the demand for higher-yielding assets is extending the property cycle,” said Johnson.

Little over a year ago, the cycle was seen as nearing maturity and the investment community was gearing up for higher interest rates and even recession, he said.

“Today, it’s a quite different scenario with the Reserve Bank delivering successive cuts to the Official Cash Rate and economic growth expectations easing globally – yet there’s still an abundance of capital.

“Solid investment returns mean the real estate ‘story’ remains compelling, but every cycle comes to an end and investor strategies need to reflect that this cycle has moved into extra time.

“While this prolonged cycle has been rewarding for many investors in commercial and industrial property, investors need to take stock of their approach and resist the temptation to expect an endless continuation of the returns we saw at the peak.”

Johnson said there was a danger that chasing continued performance at unrealistic levels could lead unwary investors further up the risk curve, beyond their “comfort profile”.