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Bayleys Research


NEW ZEALAND OFFICES 2011

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Over the last 12 months, the office sector in New Zealand has struggled with faltering economic growth both within New Zealand and globally. As a result of a number of quarters of receding economic growth, businesses were shrinking, reducing their fixed costs in a bid to withstand the recession. New Zealand’s local economy is improving once again though, albeit at a very slow pace. National economic growth was 0.1% for the June 2011 quarter, bringing the annual rate of economic growth to 1.5%, according to Statistics New Zealand (StatsNZ).

 

 

As the economy continues to improve, business expansion and employment growth will commence once again and the current oversupply of office stock will be absorbed. Decreasing vacancy will eventually lead to upward pressure on rents as the market moves through the bottom of the rental curve. A lack of speculative office construction in New Zealand’s provincial office markets since the global financial crisis (GFC) has helped to keep vacancy levels relatively low to date. This will help to bring the market back into balance sooner.

Throughout all stages of the cycle, it is prime office accommodation that leads the cycle. With the lack of construction over recent years office stock in many provincial cities becomes tired. It will be proactive landlords, who recognise the need to upgrade space in order to attract a tenant, who will benefit from shorter spells of vacancy. This is already being observed throughout the country and will likely be an ongoing trend as competition for tenants continues.

Confidence that the office sector is moving through the bottom of the property cycle is being reflected in asset values also. The Investment Property Databank (IPD) index of commercial asset values shows that annual asset depreciation has slowed considerably since the depths of recession. At the deepest point of the property downturn, in the year to June 2009, commercial offices throughout New Zealand were devalued at a rate of 12.2%. Two years later, in the year to June 2011, IPD results show annual asset valuation to be down only 3.4%.

 

 

As commercial asset values have been heading towards positive growth, total investment returns have been recovering too. Total returns, which IPD also monitors which combines income returns with asset value changes, have been positive for the office sector for 15 months. This is essentially due to the consistency in income returns over the same period.

The track of total returns shows that the office sector is lagging other property sectors though. The office property market was the last of the sectors to go into recession so unsurprisingly it is lagging the industrial and retail sectors in the upswing. This compounds the sentiment that has been picked up in Bayleys Research’s national market survey that the office sector is lagging behind in the recovery, but it is at the bottom of the cycle.

 

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