Market Pulse

Market Pulse

Total Property - Issue 2 2017

What the experts say

The insights that will help you plan your commercial property strategy for the coming financial year.

Total Property asks the major players, the economic experts and the country’s leading political and business figures how they see the market performing over the next 12 months.

What are the biggest challenges facing the commercial and industrial property sector? And what are the biggest opportunities?

Owen Batchelor, vice president of equity research at First Capital New Zealand

The economic environment is positive and that’s supporting occupier demand for space in the office, industrial and retail sectors. We’ve had declining vacancy rates, falling yields, and rising asset values in most sectors for a number of years, but the commercial property sector is cyclical and the current cycle will eventually turn. Any turn in the market is likely to lead to a softening in yields and downward pressure on asset values. A number of the listed vehicles have de-levered their balance sheets over recent years, which is sensible as falling asset values will likely place pressure on gearing levels.

For developers and landlords, rising construction and funding costs are certainly an issue, as is availability of credit. However, a number of major developers anticipated this and as a result locked in funding throughout their development periods. Landlords in the industrial and retail space should continue to do well, whereas the outlook for landlords in the office sector is more uncertain, with a significant amount of supply set to come online over the next few years driving a very competitive leasing market, which may keep rents in check.

For buyers, the biggest challenge is finding attractively priced stock. At the smaller end of the market, properties are reaching very low yields.

Sellers are most likely to do well given that there remains a lack of assets available for sale, and will most likely see the benefits from rising asset values.

Nick Cobham, PSP portfolio manager at AMP Capital

With low vacancy rates and firming property yields, all sectors of the commercial property market have enjoyed a good level of capital growth in recent years. But there is likely to be more of a focus on income returns as the rate of yield compression gradually begins to slow.

New Zealand is still seen as an attractive market to invest in and increasingly so by overseas institutional investors as they continue to seek out the comparatively high cap rates offered, not only relative to bond spreads but also to the balance of their international real estate investments.

Scott Pritchard, chief executive of Precinct Properties

There are some great opportunities, particularly around continued growth in the innovation and SME sectors. This will lead to more flexible use of real estate and we have seen co-working offerings grow in response over the last 24 months. This is something we are excited to be involved in through the 50 percent stake we have taken in co-working operator Generator.

Chris Green, director of economics and strategy at First Capital New Zealand

The economy is tracking at around 3.5 percent, but of that about two percent is population growth. The underlying real growth, in terms of per capita growth, is tracking at around 1.5 percent. That’s below the long-term 1.7 percent trend growth in GDP per capita. Probably two thirds of New Zealand’s population growth is migration. If New Zealand First leader Winston Peters secures some sort of kingmaking role after September’s general election, then his agenda to restrict migration flows could pose a risk to that figure.

Nick Tuffley, ASB chief economist

Demand for new buildings should remain strong given the general strength of population growth. That, more than anything, will determine how long a high level of building activity is sustained. But there are a few challenges to overcome to make development in New Zealand more attractive.

Various costs and processes can be streamlined, particularly around consenting processes. Easy certification of foreign building products could help reduce New Zealand’s relatively high construction costs, yet keep up standards.

International players are likely to retain interest in New Zealand while it continues to show good economic health and while interest rates in most other developed countries remain low and depress commercial rental yields elsewhere.

Gareth Kiernan, chief forecaster at economic analysts Infometrics

The non-residential market tends to lag behind the general economic cycle, so 2017 is likely to be another good year for commercial and industrial property owners and investors. Rents will continue to come under upward pressure, and low interest rates will support continued investor demand and keep prices up. Perhaps the biggest risks lie further down the track, particularly in an area such as Auckland commercial property, where a significant pipeline of new space will become available over the next 18 months. As in any cycle, there is a risk some segments of the market will become oversupplied, particularly if economic growth slows while the rate of new space coming to market reaches a peak.

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