What lies ahead
Total Property - Issue 8 2017
WILL THE POLICIES OF OUR NEW LABOUR-LED GOVERNMENT SLOW THE MOMENTUM OF A COMMERCIAL PROPERTY MARKET THAT’S HAD ANOTHER STRONG YEAR?
BY BAYLEYS NATIONAL DIRECTOR COMMERCIAL JOHN CHURCH
Welcome to our eight and final Total Property for 2017 in what looks likely to end as another very good year for the commercial and industrial property sector.
It has been a year of two halves for the market. A traditionally slow first quarter as activity gradually wound back up to full capacity again after the Christmas break - was followed by another two poor months. Both the volume and value of sales in April and May were down noticeably on the previous year.
A clampdown by our Australian owned banks on property lending, which had become evident in the latter part of 2016, looked like it was starting to bite. All the signs pointed to a significantly changing market, for both residential and commercial property. However, unlike the residential sector, commercial property sales activity picked up again in June. It was almost as if somebody had turned the switch on again.
A good level of sales has been maintained since then across all value ranges. There appears to have been a slight easing of activity in the lead up to the recent election and in the month long hiatus that followed, but the impact hasn’t been significant – an encouraging sign perhaps that what politicians do or don’t do has a limited effect on markets.
The leasing market has been a stellar performer again this year. Leasing activity reflects business sentiment and confidence, which has remained buoyant on the back of an economy that’s in excellent shape. This in turn has helped the investment sales market because strong occupier demand and low vacancy rates take much of the tenancy risk out of buying commercial property.
It’s probable that sales volumes and values will be lower this year than in 2016, although not by the significant margin that seemed likely earlier in the year. There are a number of reasons for this:
• 2016 was a record year, with an abnormally high volume and value of sales;
• As already mentioned, accessing funding has become more challenging with increased due diligence requirements from the banks;
• All agencies have found it hard to secure a sufficient supply of good quality listings to satisfy demand.
Despite this, a large number of good sales are being concluded. Our well established Total Property portfolio auctions continue to achieve an average clearance rate of around 80 percent. Strong demand for a limited supply of good investment offerings means yields have maintained their firming trend, particularly for industrial property which has been the market’s best performer.
Empty buildings continue to sell well, driven predominantly by growing businesses taking advantage of low interest rates to borrow and buy rather than rent. Smaller investors’ appetite for property syndications shows no sign of abating, although it’s harder for syndicators to find properties of sufficient quality to satisfy this demand.
Big land sales are also being made, despite development funding challenges. Recent examples include Bayleys' sale of an underdeveloped 3.2 hectare site in Mt Wellington to Kiwi Property Group for $27.115 million and a larger, confidential transaction of a big block of industrial land in South Auckland. Meanwhile, our hotel and tourism division is having a cracker of a year on the back of the sale of key CBD sites for hotel development at record land prices.
The question of course that everyone is now asking is whether the market will lose momentum under the new Labour-led coalition Government.
BRIGHT LINE TEST
The Labour Party had already flagged before the election that it would extend the current bright line test requiring investors to pay tax on any capital gain arising from the sale of an investment property - from a two-to a five-year period after purchase. This in itself is unlikely to dissuade many investors from
"IT IS LIKELY TO BE BUSINESS AS USUAL FOR THE MARKET AS WE HEAD INTO THE NEW YEAR... BUT KEEP AN EYE ON KEY ECONOMIC INDICATORS."
acquiring commercial property. Any other significant tax changes have been ruled out before the next election.
The details of restrictions on foreign ownership of property had not been spelt out by the time Total Property went to print. However, these seem likely to be primarily targeted at the residential and rural property markets and it’s hard to see them having much impact on commercial property.
The biggest watching points for investors will be the impact on economic growth and inflation of the coalition’s policies. A substantial cut in immigration would reduce GDP growth and have an impact on business demand for premises. It would also put upward pressure on wages, as would an increase in the minimum wage and any new fair pay agreements. This, in combination with greater government spending, is likely to increase inflation, which in turn will result in increased interest rates.
Once there is clear evidence that interest rates are trending upwards again – which may also be driven by better performing global economies moving away from low interest rate policies - then expect property yields to follow suit and soften from their current record low levels.
In short, there’s nothing that commercial property owners and investors need be too alarmed about as a result of the change in government and it is likely to be business as usual for the market as we head into the new year. However, longer term keep an eye on key economic indicators. A solidly performing, low inflation economy has served the commercial property market very well in recent years. Any significant deviation from this will have a dampening effect on our market.
Our last Total Property portfolio for the year is traditionally our biggest and this year is no exception. There are more than 100 listings from around the country available for your consideration across all sectors of the market. We’ll be off to another early start in 2018, with our first Total Property for the year closing in mid-January for release early February. In the meantime, we look forward to a strong finish to 2017 and in helping you achieve your investment goals.
Read more market insights from Total Property
Subscribe to receive the latest commercial news and insights from Bayleys Total Property