It’s been interesting to see the amount of transactional activity in the commercial and industrial property sectors, both sale and leasing wise. This has led to several people over the last week or so suggesting that with Quantitative Easing and the lowering of bank deposit and lending rates, we are likely to experience asset inflation going forward.
Those that own property and other assets will be the benefactors, with those that are waiting to buy likely to be worse off.
Talking to my colleague Brad Martin last week, he is one of those that holds this view on asset inflation.
Brad Martin – NAI Harcourts Commercial Sales & Leasing
(former Director, Financial Markets, Westpac)
New Zealand has now embarked on a Quantitative Easing (QE) programme which, whilst undertaken by many large overseas countries initially during but also post the Global Financial Crisis, is a first here in New Zealand. The overseas experience ultimately saw asset prices rise quite significantly, as investors discovered that QE suppresses interest rate levels, and over time injects more liquidity into the economy, and resulted in investors chasing yielding (income producing) assets including equities and property.
We obviously don’t know if this time around QE will have the same effect, but it is playing a role in maintaining very stimulatory (low) interest rates and over time should encourage consumption and investment as confidence hopefully returns.
The ultra-low interest rate environment also makes traditional forms of generating a return from capital, such as term deposits, less attractive for investors and entices investors to look for assets to generate better returns on their capital bases. Investor demand for yield that outperforms term deposits was occurring prior to Covid-19 and prior to the RBNZ slashing the OCR to all-time lows and conducting QE – the big question is what are investors going to do now, given interest rates are even lower?
These are important themes for investors as all indications are we will be living in a low interest rate world for a very long time – investors with an income generating requirement need to consider the return as well as the protection of their capital base. No guarantees of course, there is risk with everything, but my personal perspective as an unashamed optimist is that when confidence returns, including confidence from our banks to lend, cash and debt will be put to work and the yield chase will still be well and truly alive, particularly for quality assets, just with lower yields on offer and correspondingly higher asset prices.
We have eight upcoming auctions and for the first time in recent memory, all the owners appear to have an absolutely genuine (and sometimes confidential) reason for selling. On that basis one asks oneself, why would you be selling assets at the moment? And that can depend on your stage of life or various other factors, such as health, family or marital situation, partnership splits, desire to tick off items on the bucket list, not wanting to leave risky assets to loved ones or a number of other genuine reasons to sell. The lockdown has given businesses time to reflect on and review their business models, while individuals have taken the opportunity to make life decisions about their futures – work-life balance, spending more time with the family, travelling, buying some toys and just putting more fun and enjoyment back in their lives.
