A message from the Board

As we reflect on the year that’s been, 2023 has proven to be exceptionally busy for First Light Capital.

Throughout the year and across the wider portfolio of twelve syndicates and funds, we have successfully completed 28 rent reviews, ensuring the ongoing health and growth of our portfolio. Additionally, we were thrilled to welcome three new tenants and secured six lease extensions, solidifying our tenants’ commitment to remain with us long-term. Looking ahead to 2024, we anticipate an even more bustling year with 30 rent reviews on the horizon. Many of these rent reviews are structured on a three-year to market review basis, promising a significant increase, as we have seen rental rates rise rapidly over the last two to three years.

The team has successfully completed two property sales and one new acquisition during the year and will be aiming to look at further acquisitions in the year ahead.

We continue to communicate with multiple funding providers to ensure that we negotiate the best funding rates available. Any change of funding provider will come with additional costs which include establishment fees and valuations, so is not always beneficial. However, it does allow us to continue to negotiate hard with our current funders to achieve the best rates we can.

The team are continuing our engagement with multiple companies within the Sustainability sector. The aim is to reduce the carbon footprint across all of the properties managed by First Light Capital, with feedback from all tenants being very positive. This may involve moving to 100% renewable energy providers, the installation of solar generation where possible and reporting on carbon emissions. The net result of this is more efficient commercial properties that will be more appealing to tenants going forwards which ultimately will lead to increased valuations.

I would like to take this opportunity to wish you and your families a wonderful Christmas and New Year period, and hope that everyone has a chance to unwind and take a break for the year ahead.

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2023 Market Update

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As 2023 draws to a close, we start to look to the year ahead and what that may bring. For some time now, 2024 has held the promise of economic improvement.

We’ve lived in a state of turbulence since the Covid pandemic in 2020, but now that we’re seemingly on the cusp of a reprieve, it’s worth taking stock and asking ourselves if it’s actually there or not.

There’s no sugar-coating the fact that the last two years have been challenging for commercial real estate.

The effects of high-interest rates have dominated economic activity, but talk is now turning to when they will come down again, rather than how much higher the OCR can go.

Last week’s GDP figures from Stats NZ showed our economy shrunk by 0.3% compared to the June quarter, which is a step in the right direction for borrowers.

The question on everyone’s lips is, when will interest rates come down? And when will inflation slow down?

Inflation currently sits at 5.6%, still outside the target range of 1-3%, but down from the highs of 7.2% seen last December.

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The Global Picture

Overseas, there are signs that inflation is coming down relatively quickly. That doesn’t necessarily mean New Zealand will follow suit, but we do tend to follow international trends. For example, as overseas inflation decreases, import prices decrease, and so does New Zealand’s inflation.

And those trends may be surprising to some:

China is currently tackling deflation, in stark contrast to much of the rest of the world. China’s CPI dropped 0.5% in November, with food prices down 4.2% on the year prior, prompting calls for the government to prevent a downward spiral of prices.

The latest CPI numbers out of the US last week showed slightly slower inflation. The 3.1% growth in the year to December is down from the 3.2% in the year to October. The Federal Reserve also held interest rates steady for the third consecutive time, forecasting cuts for next year, which has rapidly shifted market expectations lower.

Inflation has tumbled in Europe too. Where inflation was running hot at more than 10% year-on-year 12 months ago, it was 2.4% in November, a drop of 0.5% from October.

Inflation manifests itself across all stages of supply chains, hitting consumer prices towards the end of the inflation cycle. “Profit-led inflation” (where companies increase their prices by more than actual or expected (or fictional) inputs inflation – evident recently in energy, food, airline, and hotel room prices), tends to come down quickly once consumers stop spending. This partly explains why the normalisation of these numbers is ahead of many forecasts, creating some hope for an ease in interest rates earlier than predicted, while some economists expect European interest rate cuts as early as April next year, the majority expect it’ll be at least July before that happens.

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Commercial Property

We can’t deny that the last 24 months in commercial property investment has been challenging. This is true for the real estate sector globally, with three universal issues:

1. High-interest rates (particularly as remaining fixed rate mortgages/debt come up for refinancing)

2. Weakening demand for office space in a hybrid working world

3. Rising maintenance costs and the transition to sustainability

While we’ve seen reduced returns in New Zealand, we’ve actually coped with the turbulence fairly well and appear to be well placed to tackle at least those first two challenges.

Colliers’ New Zealand Research Report this month signalled that organisations are reassessing remote work policies and making plans to accommodate more people back in the office - while also having flexible working arrangements. Remote work is here to stay, but so too is the need for an office.

The report also stated that prime office vacancy rates are amongst the lowest in Australasia, creating a spillover effect into better quality B-grade space. At the same time, industrial leasing availability is predicted to increase in 2024, but it must be noted that it’s currently at a record low level of 1.8%, and has been for more than a year.

We can conclude with some certainty that the rent increases of the last couple of years haven’t had much effect on vacancy rates - though we should also note a fair portion of properties will not have been refinanced in this time.

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NZ Interest Rates

In New Zealand, the Reserve Bank seems reluctant to move away from the “hike, hike, hike” paradigm. In November the OCR forecast had no prospect of cuts before 2025. It even left the door open to go higher from the current 5.5% if inflation was stickier than anticipated.

While New Zealand may remain in the current high-interest rate environment longer than other countries, there are signs the domestic markets are adjusting interest rates down, faster than the Reserve Bank forecasts, especially after the US Federal Reserve announcement of last week expecting rate cuts to commence in 2024. This could be an interesting economic tug of war to watch for next year.

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AML audit

First Light Capital has recently undertaken an AML/CFT (Anti-money Laundering and Counter-terrorism Financing) audit by One AML. We are pleased to report that we achieved a pass in all elements that were audited. Thank you to all of those who have recently provided updated ID and address details or who have completed our online AML certification by using the Cloudcheck platform.

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Going Forward

At the risk of sounding like a broken record, the basic fundamentals of commercial property investment remain critical: premium properties in premium locations with premium tenants. The high inflation and interest rate environment has also highlighted the need for strong rent review mechanisms.

Colliers expects an increase in investment activity next year, driven by sound occupier fundamentals and stabilising interest rates.

The new National-led coalition government has signalled its intent to be kinder to residential property investors, including by reinstating interest deductibility for landlords. This positioning
is one residential investors can take heart in. However, as just announced in the Mini-Budget of 20th December, they are also removing the depreciation deductions on commercial and industrial buildings from 1 April 2024 which will impact the post tax returns for commercial real estate investors.

Looking back at successful investments of the past, times where only the strongest players are in the market can offer the best opportunities for the best returns. I’m really pleased with the position we’re in after navigating the last few years, and am looking ahead with optimism.

2024 may not quite be the promised land, but it is still promising. And that’s more than we’ve been able to say for a while.

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First Light Capital in the community

Members of the First Light Capital team along with their families attended this year’s Auckland based NZME Children’s Christmas Party. This was held at The Trusts Arena in Henderson on Saturday 9th December and is an amazing event that brings Christmas to over 2000 children that suffer from life threatening illness, physical/intellectual impairment, domestic violence or are from an underprivileged background. The event is filled with celebrity stage shows, fun rides, exhibitions that range from museum cars to police and fire service teams. There is also a Santa’s grotto which includes a “silent hour” where children with hearing/concentration issues get to meet Santa where the usual shopping mall situations are too daunting.

This is a truly humbling event and one that First Light Capital are proud to sponsor and will continue to do so going forward.

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