Strength evident across the sector
JLL survey predicts solid future for commercial property, some challenges looming in the economy
We’re still enjoying the afterglow of an America’s Cup victory, plus a successful (from a retailer’s perspective) Lions Rugby Tour. But away from the sports arena, the wider New Zealand commercial property market is performing well too.
The Lions Tour historically, has brought in millions of tourist dollars and in 2017 it hasn’t failed to disappoint says JLL associate director of research and consulting, Tom Barclay.
Though the final numbers haven’t been tallied it was predicted that this tour would bring in $26.7 million to Auckland alone and generate 165,210 bed nights, which pushed accommodation providers to their limits, says Barclay. He says though the sentiment for commercial property market is positive, some concerns are evident. Interest rate increases and the availability of credit to the commercial property market, remain front of mind, while geopolitical uncertainty offshore poses obvious risks to us as a trade dependent nation. New Zealand has been a popular place to invest of late, particularly with offshore interests.
“Some investors have been removed from the market as access to funding has tightened, although this mainly impacted on local investors operating in the $1 million to $10 million bracket and for development plays rather than institutional quality stock. Even with foreign buyers active, the rate of yield compression has slowed throughout the country in response to a bottoming out of interest rates. It is possible that premium assets will see further yield compression with secondary and noncore stock likely approaching a cyclical low point,” says Barclay.
Office market
JLL recently reported Auckland is a “sweet spot” for tenants. This rings true, with a growing number of white collar workers in the city and numerous tenants committing to higher quality space this year to date, predominantly in the prime sector of the market.
Says Barclay: “CBD vacancy rates have risen slightly to 6.8 per cent in our June 2017 survey, up from 5.4 per cent in December 2016. This can largely be attributed to refurbished properties re-entering the market along with the completion of some major new buildings, resulting in occupiers like Datacom leaving behind some substantial backfill space. Vacancy is still at historically low levels and given the limited supply to be delivered over the next 18 months, vacancy is expected to stay tight. Overall the market remains favourable for landlords.”
Rental growth is still present in the market, although this has slowed from the rapid pace of increases observed over 2015 and 2016.
Industrial market
New Zealand’s industrial market has remained strong so far this year, with the BNZ performance of manufacturing index indicating a score of 58.5 in May, its highest level in 16 months, signalling the manufacturing sector is in growth mode.
Vacancy levels remained fairly flat across Auckland at 2.9 per cent of the 10.89 million square metres JLL tracks. The North Shore market was the toughest point to enter with a vacancy rate of only 2.2 per cent.
“Substantial new supply continues to enter the market, predominantly in the South Auckland precinct. Persistently low vacancy rates indicate that demand is more than capable of meeting new supply. The pipeline currently under construction which JLL tracks, exceeds 150,000sq m, indicating the confidence developers have in the strength of the occupier market,” says Barclay.”
Investors are active and with their interest comes compressing yields, with the prime average dropping below 6 per cent to 5.8 per cent for the first time, and secondary yields sitting at 7.38 per cent.
Transactions for the year to date have typically been in the sub $10 million market, with some acquisitions and disposals by listed sector above this price point.
Retail market
With consumer confidence at its highest levels since 2015, the Auckland retail market has been a strong performer so far this year.
Motor vehicles, food and accommodation proved to be the most popular items on consumers wish lists, with the latter indicating that tourism has had a strong hand in this, no doubt helped along by the recent Lions Rugby Tour.
Rental growth has slowed with small increases in the CBD area and bulk retail markets.
Prime locations are performing well, while the dominant regional centres and premium high street retail areas place pressure on secondary retail locations, says Barclay.