Another vintage year ahead for commercial property
By John Church, Bayleys’ National Director Commercial
Total Property - Issue 1 2016
MANY OF THE FAVOURABLE MARKET CONDITIONS THAT CONTRIBUTED TO A RECORD 2015 FOR THE COMMERCIAL PROPERTY MARKET SHOULD REMAIN IN PLACE TO MAKE 2016 ANOTHER VINTAGE YEAR,SAYS BAYLEYS' NATIONAL DIRECTOR COMMERCIAL REAL ESTATE, JOHN CHURCH.
While there has been a nervy start to 2016 across a number of investment markets – with New Zealand and global share markets exhibiting considerable volatility in the first two months of the year – it’s been very much business as usual for the New Zealand commercial and industrial property market. The market ended 2015 on a very strong note, as evidenced by our final Total Property auctions for the year with 28 out of 39 Auckland auction listings selling at a clearance rate of over 70 percent. A number of excellent results were also achieved in regional auctions with a medical centre in Paeroa setting a new benchmark yield for the town of 6.7% and a fully leased office building in Tauranga selling for $2,205,000 at a 5.4% yield, while an electrical outlet in central Taupo sold by tender at a 6.2% yield. With 2016 now well underway, it is clear that the market has picked up where it left off last year. Most commercial agencies are reporting a very active and buoyant start to the year and that’s certainly been the case for most of our offices.
UPLIFT THROUGHOUT THE COUNTRY
There’s no doubt that Auckland is still leading the market with record net migration levels and substantial construction projects providing plenty of economic stimulus. Continuing employment growth is putting additional pressure on already low vacancy rates across many of the city’s industrial, office and retail accommodation markets. There was a significant uplift in the Wellington market in the latter part of last year. That market should continue to benefit from a perception among a growing number of heavy hitting investors that the Auckland market is close to peaking and the capital is at an earlier stage in the current upward cycle. Despite the challenges it is still facing five years on from its most devastating earthquake, there is increasing recognition that Christchurch is making an excellent fist of rebuilding its shattered central city and good solid sales are being concluded across all sectors of the market. Perhaps most pleasing is the substantial pickup in activity in many regional markets. Anecdotal evidence suggested these markets were showing good growth in the latter part of last year and the record numbers now coming through in some areas are confirming this. The Tauranga/Mt Maunganui market has been performing strongly for some time now but very high levels of activity are also being recorded in areas which are benefiting from record tourism numbers such as Queenstown, Taupo and the Far North while regions such as Nelson/Marlborough and Hawke’s Bay are also benefitting from a buoyant viticulture sector. Obviously the downturn in the dairy sector is of concern for regional markets and nationally it is likely to dampen economic growth for the first part of this year at least. Banks have so far taken a patient approach and have been capitalising interest on rural loans for the past year or so but this can only last for so long. Unless there is a turnaround in the performance of this sector, there could eventually be some flow on effect for property markets.
ALL GO WHILE RATES ARE LOW
However, for the moment we are experiencing excellent levels of enquiry around the country, including from new investors seeking a stable asset class yielding a satisfactory rate of return. Some of this enquiry is due to the defensive qualities of commercial property that increases its appeal during periods of market volatility, but the predominant driver of investment activity remains very low interest rates. The Reserve Bank has indicated these rates are likely to stay at low levels for the next three years. Continuing falls in the price of commodities such as oil and dairy means some economists are now picking further cuts in the Official Cash Rate this year. This will make commercial property even more attractive for investors facing miniscule returns from bank deposits and bonds. It also means purchasers can take advantage of very low borrowing rates to secure superior returns on their equity and owner occupiers can acquire their own premises at a similar or lower cost to renting.
As a consequence, we expect both local and offshore investor demand for commercial and industrial property will continue to outstrip supply. There continues to be phenomenal international interest in New Zealand property at present. Chinese investment interest will remain strong, and we are expecting increasingly significant enquiry out of other parts of Asia, such as Indonesia and India, as well as from Europe where cash rich investors are looking for alternatives to their own insipid markets. However, offshore investors are now facing stiffer competition from a growing pool of New Zealand-based purchasers right through the value chain. Senior members of our International Division will be heading offshore again in April to touch base with existing and prospective purchasers in Singapore, Kuala Lumpur and China and we would encourage vendors not to overlook the opportunity that international exposure provides to ensure you get the best possible price for your property. We are also anticipating even more activity and a greater range of opportunities in the syndication and managed property funds sector in 2016 with Augusta’s recently launched innovative Value-Add Fund generating huge enquiry. New offerings such as this will fill a void in the market for private and corporate investors looking for greater returns on equity.
Read more – Request the full article