Market's engine room fires up

Market's engine room fires up

Total Property - Issue 7 2017

Industrial property, traditionally regarded as a steady investment asset, is now a star performer

By Bayleys National Director Commercial John Church

The engine room of the commercial property market – the industrial sector – has been firing on all cylinders in recent times, fuelled by continuing strong business growth.

The number of locations from which industrial businesses operate has reached its highest level ever, with an employee count that has surpassed its previous high prior to the global financial crisis.

While growth has been spread across the distribution and warehousing sectors, it has been most pronounced in the construction industry, following a substantial increase in residential, commercial and infrastructure projects. Construction worker numbers have increased by more than a third since 2012.

A ramping up of industrial development activity has struggled to keep pace with demand from tenants and owner-occupiers, meaning that vacancy rates remain very low in many parts of the country, as our national industrial overview article in this issue outlines.

Despite more than one million square metres of new industrial premises being consented across Auckland over the past four years, industrial vacancy remains at historic lows of close to three percent. In Hamilton, the vacancy rate is 2.8 percent, while in Wellington it’s at its lowest level since the last market peak in 2008.

This high level of occupier demand makes industrial property a highly sought after investment asset as evidenced by the fact that it comprised 56 percent of commercial property sale transactions in 2016 in the country’s largest market of Auckland.


Industrial property has traditionally been viewed as a steady performer, providing a good income yield but lower capital growth than retail or office property. That is no longer the case, as shown by the MSCI Property Council Index, which values and tracks a multi-billion-dollar portfolio of commercial property throughout New Zealand. Over the past five years total returns (income plus capital growth) from industrial property have averaged 12.4 percent annually, comfortably ahead of retail (10.9 percent) and office (10.6 percent).

The higher yield differential industrial property used to enjoy is also a thing of the past. Bayleys Research’s Median Yield Index for Auckland industrial property established in 1988, when the median yield sat at over 10 percent, has now fallen to its lowest point ever – almost half that figure at 5.4 percent.

The availability of affordable industrial land will play a big role in determining our future industrial landscape. Both Auckland and Queenstown, at opposite ends of the country, face similar challenges in this regard.

Booming Queenstown can claim the dubious honour of having the country’s most expensive industrial land, with larger serviced lots selling for around $1,000/m² – if you can get them. A big increase in large format retailing in Frankton has added to the supply and price pressures. Queenstown Lakes District Council is to undertake a much needed reassessment of the supply of industrial land in the next stage of its district plan review.

An analysis of industrial building consents by floor area in Auckland by Bayleys Research indicates they have dipped this year. Development is being hampered by a shortage of land with much of what is available at a price level that makes it difficult for an industrial project to stack up financially. Tougher bank lending criteria have also had a big impact on the development sector.

As a result, industrial development is predominantly occurring within areas where large land owners such as Auckland International Airport, Goodman, Kirkpatrick Property Group and Euroclass have contributed much of the 190,000m² of new projects in the past year, or within emerging precincts on the periphery of the city such as Silverdale in the north and Hobsonville and Westgate out west.


Sites in new industrial subdivisions in West Auckland have been snapped up much more quickly than many anticipated. In future, Auckland will need to look south for much of its industrial land supply to areas such as Takanini and Drury once Stevensons’ massive redevelopment of part of its quarry site gathers momentum.


The Government's recent commitment to this precinct means Drury will be the first to benefit from its $600 million infrastructure fund.

In the meantime, Auckland’s challenge is opening up big opportunities for Waikato and Bay of Plenty industrial property owners. It has provided welcome impetus for small towns such as Pokeno and Tuakau. Strategically positioned close to SH1 and roughly halfway between central Auckland and Hamilton, they are offering large lots for industrial development at attractive prices.

The industrial property sectors in Tauranga and Hamilton are also thriving, with both cities being important cogs in the “Golden Triangle” of trade that is developing between them and Auckland and which will be enhanced by further improvements to road, and possibly rail, links.

With land packages priced around $265/m² in the new 60-ha Te Rapa Gateway industrial estate alongside SH1 in northern Hamilton, it’s not hard to see why businesses are being enticed further down what will eventually be part of the same southern motorway when the 102km-long Waikato Expressway is completed in 2021.

Tauranga also has an abundant supply of affordable industrial land. This, in combination with an attractive coastal lifestyle offering and population growth, will continue to attract businesses eastward.

Further south, both Wellington and Christchurch’s industrial property markets have, perhaps perversely, benefitted from the seismic upheavals they have had to confront. Relocations and storage requirements resulting from earthquake damage, coupled with a strongly performing regional economy, have produced the highest level of industrial leasing activity in Wellington in many years.

Christchurch has benefited from a significant increase in the supply of new industrial premises. Building consents show an average of nearly 250,000m² of new industrial floor space have been added annually since March 2012, which has included large format warehousing for Cardinal Freight, Mainfreight, and Sorted Logistics. This has helped Canterbury cement its position as the South Island’s distribution hub.

This is our second to last Total Property portfolio for 2017. Vendors have one more opportunity this year to tap into the strong demand for commercial and industrial property that still prevails, with our final portfolio being released in early November. We look forward to being of assistance.

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