Capital poised for high returns
Commercial property is performing well around the country off the back of a strong economy, but Wellington is in a particular sweet spot, an economist says.
Kelvin Davidson of Infometrics said a combination of factors could see investors in the capital enjoying returns of up to 17 per cent a year in the foreseeable future.
The quake-driven shortage of space was good for capital gains, but ‘‘income could be the real star’’, he said.
Economic drivers such as low unemployment and a lively retail scene were applying upward pressure on rents, putting returns in Wellington on par if not ahead of other strongly growing centres such as Auckland and Hamilton.
‘‘The thing about Wellington is it’s a pretty safe and steady market, not only for offices but also retail,’’ Davidson said.
This was because ‘‘you’ve got that base of public-sector work, which provides a pretty steady foundation for commercial space in the city … and those people spend money at lunchtime’’.
According to Infometrics’ quarterly regional research, most Wellington indicators were strong, including traffic flows, building consents and house prices.
Unemployment in Wellington was 4.6 per cent, as low as it’s been in the past six years, and the number of people on a Jobseeker Support benefit fell in the year to June, the report said.
‘‘Our provisional estimate is that Wellington City’s GDP expanded by 2.5 per cent in the year to June 2017. That is comfortably above the average of 1.9 per cent for the past decade.
‘‘In other words, the demand side of the commercial property market is strong.’’
After November’s Kaikoura earthquake, quake-related restrictions meant vacancy rates were very low, Davidson said.
Less than 1 per cent of prime office space in Wellington’s CBD was vacant, compared with Christchurch’s more than 20 per cent and Auckland’s 4 per cent.
There was also spillover effect from that tight supply into industrial property, he said. Anecdotal evidence was that smaller tenants had no choice but to move to the CBD fringe and convert exwarehouse space into offices.
‘‘But construction lags mean that this new or refurbished space won’t be available until 2019 or later,’’ Davidson said, noting that much of the best new space had already been pre-let.
Future job creation in Wellington was also looking healthy. About 1550 ICT jobs are expected to be created there in the next four to five years and other sectors would help keep occupier demand high.
A recent Colliers International survey showed high levels of investor confidence about Wellington’s commercial property prospects, ‘‘reflecting optimism about rental growth and income streams at least out to 2020’’.
Wellington property yields or ‘‘cap rates’’ were not too high, so the scope for quick and easy capital gains was limited, Davidson said. But even so, ‘‘landlords still look likely to enjoy tidy returns over the next few years’’.
With a standard yield of 7 per cent and a possibly 10 per cent rise in rents, annual total returns could rise to as much as 17 per cent.
‘‘If anything, the balance of risks to that figure lies to the upside. On the whole, it’s a good time to own commercial property in the capital,’’ Davidson said.