• 

  Download Full Report - 859.0kb

NEW ZEALAND INDUSTRIAL 2011

Introduction

Industrial property has emerged as the leading sector as a general recovery is seen across the office, retail and industrial markets. Increasingly the evidence and sentiment of the general commercial and industrial sectors is reflecting a market moving through and lifting out of the bottom curve of the property cycle. The last four years has seen adjustments in the fundamentals with weaker rents, softening yields, lower land values and reduced construction. The market is now recognising that these adjustments are, in most cases, over and that the next movement will be more positive. Activity levels around leasing and sales are increasing as investors and owner occupiers look to secure a position at what many are seeing as the bottom of the property cycle.

Within the general uplift, the industrial sector is leading the way in the recovery. This is most clearly illustrated in the level of returns that are being recorded in the sector compared to office and retail. This returns data shows that the industrial sector is the only one showing capital growth on an annual basis, suggesting rents are increasing or yields are firming, or a combination of both.

The June 2011 quarter results from the Investment Property Databank (IPD) performance indices show that total returns (income return plus capital gain/loss) for industrial property was 9.1%, with an income return recorded at 8.9% and an increase in asset values of 0.3%. Industrial property has traditionally led the property cycle recoveries as it is generally the ‘productive’ sector which breaks out of recessions first, followed by the service (office) and retail sectors. This is particularly true of the current export-led recovery of the New Zealand economy. Comparing the movement in industrial property values, we can see there is a strong connection between economic growth as measured by Gross Domestic Product (GDP). As the economy moves back into a growth phase this would suggest that industrial asset values will increase as well.

The 9.1% industrial total return compares with the combined office, retail and industrial total return of only 5.9%. While industrial property increased in value, office values went backwards by 3.4% and retail values by 3.7%. While this result may sound contradictory to the general statement for a recovery, the support comes from the slow down in the rate of decline in property asset values, which at the worst stage of the market was going backwards at over 10% per annum.

Industrial land values have seen significant downward adjusts since 2007 with sales reflecting values down 40% to 50% compared to the peak of the market and some sales show Greenfield development blocks to be down by more than that. With low vacancy levels, an increasingly positive outlook for the industrial sector and land values that make development increasingly viable, given the rental levels in the market, sales activity around industrial land is forecast to continue to increase. Many of these sales are land bankers taking the opportunity to secure land for future development. Any resultant price increases from this lift in activity is expected to be minimal although prices are generally up on where they were at the bottom of the market.

A shortage of quality industrial investment opportunities is a theme across many of the markets. Those properties that are offered for sale, particularly the better quality assets, are attracting strong interest and this is reflected in the yields being reported. It is anticipated that industrial yields will firm over the next 12 months as confidence returns to the market, supported by falling vacancy and stabilising rents, and the risk premium demanded by the market starts to close back up.