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NEW ZELAND OFFICE 2010

COMMERCIAL OFFICE MARKET OVERVIEW

New Zealand’s service industry is now the dominant sector in the economy with annual growth averaging 4.0% between 2000 and 2007 according to the New Zealand Treasury. As the New Zealand economy entered recession in 2008, services growth slowed, but not to the extent of other sectors. With the services sector expanding at a more rapid rate than other areas of the economy, the sector has increased its share of GDP from 66% in 2004 to 71% in September 2009.

While the bigger service providers have increasingly gravitated to the larger centres, particularly Auckland, Wellington and Christchurch, the service sector presence outside these larger cities has also grown to meet the needs of the increasingly diverse economies evolving around the country. Offices are an essential element of this growth. This report provides a snapshot of the current conditions of the office property markets around the country including a brief overview of New Zealand’s largest markets Auckland, Wellington and Christchurch.

Market conditions across Auckland, Wellington and Christchurch have reflected some similarities over recent times. Private and public sector tenant requirements for higher quality office accommodation triggered a wave of construction beginning in 2000. The need to retain employees during a tight labour market, a desire to reflect progress through the building an organisation occupied, coupled with the economic efficiencies of a modern premium grade building, often with green technology, have all acted as catalysts for this development. With tenant pre-commitment in place prior to construction, these new buildings are predominantly full, or will be full upon completion. Unfortunately, many of these tenants have relocated from existing buildings within the same market, resulting in secondary office space being left behind at a time when business and Government are not growing. The result is an increase in secondary vacancy.

While the economic downturn since 2007 saw the cessation of any new significant office construction projects, the extended timetable of large office projects sees substantial buildings still to be completed in Auckland and Wellington through to mid-2011. The 2007 recession also resulted in downsizing in many organisations and this further added to vacancy across all grades of offices.

Against this backdrop of suppressed leasing activity and rising vacancy, landlords have been increasingly proactive in looking to retain tenants. Extensions to existing lease terms in exchange for reduced rents or other incentives has been the general theme of the day and this has resulted in reduced effective rents.

While the latest June 2010 returns information reflects the recent market conditions, it also points to the recovery that is underway in the office sector, and the property sector in general, as it passes through the bottom of the property cycle.

Returns information from the Investment Property Databank (IPD) June 2010 New Zealand indices for the New Zealand Office sector reflects an income return of 8.2%, while the ongoing rental correction evident in the major office markets is continuing to pull asset values back by 7.4% per annum. Total Returns have therefore come out at 0.2%

Since June 2007 when the peak in the growth office asset values was reached at 15.7%, values have progressively adjusted down until the largest annual adjustment was recorded in the June and September 2009 quarters of -11.9%. Since then the rate of asset value correction has started to slow and the most recent result of -7.4% indicates a steady upward trend developing.