Industrial strength

Industrial strength

Total Property - Issue 2 2019

Nine years of economic expansion has boosted employment which has, in turn, lifted demand for industrial workspace. The results are falling vacancy rates, upward pressure on rentals and a ramp-up in development, according to Bayleys Research.

These fundamentals have created favourable investment conditions. Demand has also been bolstered by low interest rates, as investors seek higher-yielding assets such as industrial property.

Most of these fundamentals will remain in play over 2019 pointing towards another positive year.

Employment driving demand

In 2010, approximately, 425,200 people were employed in New Zealand’s industrial sector across 92,325 business units. By February 2018 these figures had grown to 514,700 (up 21%) and 104,915 (up 13.5%).

The resulting demand for workspace has squeezed down vacancy rates across our major centres, in many cases to historical lows.

The trend is particularly evident in the ‘Golden Triangle’ centres of Auckland, Hamilton and Tauranga, along with Wellington, where average vacancy rates have been trending down. They now sit at or below 3 percent across all of these cities’ major precincts.

In Wellington, vacancy reached a cyclical peak of 7.5 percent in 2012. In late 2018 this stood at 3 percent, the same as Hamilton. Tauranga has seen a particularly steep decline; in early 2015 the average vacancy rate was 13.5 percent, while in Bayleys Research’s latest vacancy survey the figure was 2.4 percent.

Conditions in Auckland have been tight for an extended period, with vacancy continuing to track down over the past year, from 3.3 percent to sub-3 percent.

Christchurch market reports indicate that vacancy rates there have begun to trend upwards. This, though, reflects unique dynamics post the 2010 and 2011 earthquakes when construction demand rose sharply.

Strong supply response

Given tightening conditions, the development sector has responded strongly. The value of industrial building consents in 2018 reached $1.4 billion, up 20 percent on 2017 and double the 2012 total.

In 2018, Auckland accounted for 43 percent of consents. Within its established precincts there is very little vacant development land and what there is generally commands values which make development unviable. The trend will be towards higher and better uses for land in industrial precincts.

Christchurch’s proportion of new development has begun to fall. In 2016 its industrial development accounted for 32 percent of the national total by value; this fell to 18 percent in 2018.

Consents across all major centres, though, increased in 2018 pointing towards another strong year of construction.

Positive returns

Industrial property has continued to generate attractive returns, according to MSCI statistics. In the year to June 2018 the total return was 12.9 percent. The sector has seen double-digit returns since 2011.

Its solid performance, along with the fact that industrial property offers a more affordable entry point for investors than retail and office property, makes the sector particularly popular.

Demand will likely be further bolstered from overseas following amendments to Overseas Investment Office regulations making it harder for most foreigners to buy residential property.

Future gazing

Rapid changes in technology and consumer demand, along with the supply of labour and land, will transform the shape, location and use of industrial property, according to a study into the sector’s future.

The Future Gazing Logistics report, by Bayleys’ global strategic partner Knight Frank, says technology will both disrupt and enhance industrial operations and the efficiency of supply chains – and give tech-ready owners and occupiers a competitive edge.

“Whilst the potential of automation, robotics, augmented reality and the internet of things are alluring … the adoption of such technologies will not be as universal, seamless or rapid as many visions of the future often maintain,” argue the report’s authors.

“Our view is that new technologies will be applied unevenly across the market – serving to bring competitive advantage to those who are able to make the necessary investments and have the required level of digital fitness.

“As industrial real estate becomes more of a source of strategic and competitive advantage, occupiers will be prepared to work in partnership with the supply side and make long-term commitments to product that suits their operational requirements and has the required levels of future proofing.

“It will be an age in which multi-user, multi-level and mixed-use product will become more commonplace as technology, land constraints and collaborative operational models are reflected in physical product,” say the researchers.

Location will be shaped by the growing importance of ‘last-mile’ delivery, along with falling demand for human resources. “We anticipate the continued rise of urban logistics facilities close to urban centres and, increasingly, within the context of mixed-use development schemes.”

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