Ryan Johnson, Bayleys’ National Director Commercial, was asked for his views on how COVID 19 has impacted commercial and industrial property investment and what are likely to be the key influences on the market this year.
National Director Commercial
What lessons can be learned from the COVID crisis and the buying activity that occurred in the months that followed?
Navigating real estate markets has become more complicated since the onset of the pandemic and now requires a greater depth of analysis than ever. Buying activity took a big hit in the April-June quarter in 2020 as a result of the COVID induced lockdown and uncertainty over the sustainability of rental income. Investors and developers were looking for good data. Bayleys therefore focused on providing better information to clients to help them make informed decisions not only during this period but through the recovery that followed in the latter half of the year.
There was a focus on lease covenants and the strength of occupiers’ balance sheets and their ability to weather the crisis. This has led to a greater price differential between prime and secondary assets. There was also a recognition that investment decision making needed to be more than just about an asset and its tenants, but also about where the asset is and other attributes around it. More consideration is being given as to how innovation, sustainability and leverage can influence the resilience of real estate performance.
Fiscal stimulus and the lowering of interest rates created an unprecedented demand for income generating assets, particularly higher value properties. In the last five months of 2020, Bayleys was involved in 18 $20 million-plus transactions worth around $620 million with our Auckland commercial and industrial division experiencing a record December. This is an indication that experienced investors are looking beyond COVID 19 and augers well for 2021.
Is NZ's reputation as a safe harbour growing and will this have an impact on the market this year?
Investors are focusing on resilient assets and markets with stable long-term growth prospects. New Zealand’s ability to manage major events like COVID and its impact on our markets has been reinforced over the last year and has enhanced our reputation as an excellent place to invest in defensive assets such as commercial property. Expect heightened offshore investment interest this year, particularly form Asia and Australia, and for this to pick up significantly once our border reopens.
What are the main opportunities for investors this year? Where will the money head to?
Positioning for resilience will remain at the heart of most investment decisions. Core industrial, office (in the first nine months of 2020, offices still attracted 45% of all transaction volumes within Asia-Pacific) and large-format retail will continue to be highly sought after. Healthcare and data centre assets have seen a spike in global interest, albeit there is limited supply in this sector in our market.
Particularly worth exploring are asset classes that align with structural changes, such as an ageing population, e-commerce and the resulting growth in logistics and supply chain premises as well as the early stages of a Build-to-Rent sector.
There will be significant opportunity for developers and many other stakeholders with last year’s release of the National Policy Statement on Urban Development which took effect in August 2020. This is designed to improve the competitiveness of New Zealand’s urban land market through more policy flexibility. We’re likely to see greater building height and density development opportunities in high growth areas in Auckland, Hamilton, Tauranga, Wellington and Christchurch particularly near rapid transit public transport stops (brownfield development) and on the fringes of city and metropolitan centre zones.
Nearly $20 billion of term deposit outlflows from major trading banks over the past 12 months have created a tsunami of cash looking for better after-tax real returns. A good chunk of this can be expected to continue to flow into shared property ownership funds. These offer smaller investors the opportunity to invest in institutional grade assets, such as Augusta’s recent launch of the Visy Glass industrial offering with a new 20-year triple net lease with fixed annual rental increases. Investors need to be aware of the trade-off between risk and reward, with a higher return generally equating to greater risk. Income sustainability and growth coupled with strength of location should be key considerations.
What should the market be concerned about this year?
• Occupancy reduction as companies reassess their workplace strategy, balancing working from home and in the office. Larger companies, particularly multinationals, are undertaking leasing portfolio reviews.
• Availability of funding from our Australian-owned banks. Lenders are becoming even more selective about the properties they will debt fund on, particularly with respect to Environmental, Social and Governance (ESG) credentials.
• Further lockdowns and the continued business disruption as the pandemic mutates around the globe.