Australasia's property market: capital growth vs. yields

The interplay between capital value growth and yields reveals distinctive patterns across various property sectors and locations in New Zealand and Australia.

Figure 1 below illustrates these trends by property type. It captures the expected relationship between the two essential commercial real estate metrics: as yields soften, capital value growth decreases.

Figure 1: Capital value growth versus yields in Australasia

Source: JLL Research 4Q24

This can be due to a combination of the following factors:

• Market demand: Firmer yields often indicate higher property demand, driving up prices and boosting capital value growth, and vice versa. The Auckland industrial sector exemplifies this trend. Despite limited capital value growth over the past year, it remains New Zealand’s most sought-after asset class, both in terms of value and number of transactions. It achieved a prime yield of 3.88% in mid-2021. While yields may not reach this level in the current cycle, higher capital value growth is anticipated.
  
  
• Risk perception: Higher yields can indicate higher perceived risk in a market or property type. Investors may demand higher returns (yields) to offset this risk, which can result in lower property values and reduced capital growth.
  
  
• Property valuation: Commercial properties are valued based on their income-generating potential. Rising yields (higher income relative to property value) may suggest that a property's value is not growing as rapidly as its income.
  
  
• Supply and demand dynamics: Areas with limited supply and high demand, such as prime CBD offices, frequently experience lower yields but higher capital value growth. Conversely, areas with oversupply or lower demand, like Auckland Suburban Retail, tend to have higher yields but slower capital value growth.

Figure 2 illustrates the relationship between capital value growth and yields across both countries, revealing several similarities:

• CBD offices are generally clustered in the middle of the chart, with moderate yields and growth rates.
  
  
• Retail properties show the strongest negative correlation (Pearson correlation coefficient -0.56 and Spearman Rank correlation coefficient of -0.50), followed by industrial and office properties.
  
  
• The small differences between Pearson and Spearman correlations for overall data (-0.32 vs. -0.27) indicate consistent relationships, whether viewed as linear or monotonic.

However, a key difference emerges. New Zealand properties exhibit more extreme variances (both high and low), while Australian properties cluster more centrally. Australian data points show a Pearson correlation coefficient of -0.72 and a Spearman Rank correlation coefficient of -0.74, compared to -0.25 and -0.18 for New Zealand.

Figure 2: Capital value growth versus yields in Australasia

Source: JLL Research 4Q24

This pattern suggests that the New Zealand property market may be more cyclical and responsive to local economic conditions, while the Australian market appears more stable across locations and property types.

Looking ahead to 2025, New Zealand yields are projected to increase by an average of 125 bps across locations and property types. The combination of lower returns from fixed deposits and reduced financing costs is expected to boost transactional activity. While stagnant rental rates in 2024 constrained both capital and income returns, historical patterns suggest this pause often signals the beginning of a recovery phase. By 2026, we expect rising rents to once again drive the capital value growth.