The end of the affair
Party over for commercial property?
Commercial property investors are enjoying great returns, but Westpac is warning that the sector may start heading the other way in just two years.
Economist David Norman said the sector was enjoying a purple patch right now but as migration and the economy slowed, so would construction.
‘‘We don’t think we’re going to see a downturn in values in the next year or so, but as we get toward 2018 we do expect capital values to flatten and potentially a small correction if we overbuild in the meantime.’’
Projects were already being canned in Christchurch, where the cost of building had prompted many developers not to invest, because the rental returns they needed to make would be unaffordable to potential tenants.
‘‘In Auckland, similar trends are emerging, with several apartment projects already being canned after rising costs made them uneconomic.’’
Investors have been piling into commercial property because of its attractive yields as the strong economy stokes employment and demand for more space.
Low returns on bank deposits have made property seem doubly attractive, with yields typically 1.5 percentage points above commercial lending rates.
The result has been capital gains and a flurry of building consents in Auckland, and much commercial rebuild work still to be done in Canterbury.
However, a shortage of builders had pushed up building costs, throwing some of those projects into doubt.
Norman said there were also business trends which could not be ignored, such as the growing number of people working from home and companies reducing their footprints through hotdesking.
‘‘That means that we’re just not going to need 15 to 20 square metres per worker going forward. The space we do have in Auckland will be able to be filled by a lot more workers and so the demand for new space won’t be as great as it may have been in the past, given the growth in the workforce.’’
By 2018, Norman believes the economy will weaken although ‘‘we’re certainly not talking about recession’’. GDP growth would be ease from 3 per cent to ‘‘well above 1 per cent,’’ population growth would slow and unemployment would rise.
Regions would peak at different times, with Auckland having more room to run and a little more steam in Wellington.
However, one of the country’s leading commercial construction firms, Hawkins Group, thinks the party might keep going longer than Westpac is predicting.
Chief executive Geoff Hunt said the Government’s national construction pipeline report from last year showed overall nonresidential construction were strong right up in the first quarter of 2020..
‘‘That says to me ... that we’re not at the peak yet, because the Auckland line is still climbing and I can’t see any falloff this side of 2020, other than for Canterbury.’’