Real estate leaders on market’s key challenges, opportunities
OneRoof Commercial asked the heads of New Zealand's commercial real estate agencies for their market predictions for 2020. Top of their concerns is the effect the general election will have on buyer activity, but all believe this year will be a positive one for the sector, and that strong buyer demand will continue to put pressure on yields.
Industrial property was a star asset class over the last decade and will be in 2020 and beyond, but that’s about all that will stay the same as transformation sweeps the logistics scene within this property type. A lack of development land, coupled with new technology and e-commerce, will start to change the face of industrial property. Warehouses will expand upwards. From a typical stud height of 9m now, some owners and tenants are starting to look at studs of up to 30m. With New Zealand’s shift to zero carbon by 2050 now locked into law, both developers and landlords will face growing demands to cut their carbon footprints. Developers and owner-occupier tenants will need to use more eco-friendly building materials and reduce concrete and steel.
There is at least $29 billion of transformative infrastructure projects planned or underway in Auckland, led by the City Rail Link, and we expect up to 200,000sq m of development around the new stations.
As the era of record-low interest rates stretches on, syndications and property funds will attract new attention as investors scour the markets for yield. Property funds and syndications offer a relatively simple and accessible way to take part in the ownership of prime commercial and industrial assets at entry-level prices upwards of $10,000.
These types of investments will become ever more attractive to new or smaller investors, as after-tax returns from many interest-bearing bank accounts languish barely above inflation. New offerings are set to diversify further into property areas such as tourism and residential.
A stellar 2019 marked the end of an outstanding decade in the commercial and industrial property market. We witnessed many record-breaking deals and a high level of confidence that puts us in a positive position to start the next decade. Two standout office deals from last year best showcase the market’s strength and the positivity for 2020.
The sales of 155 Fanshawe St ($247m) and Chorus House ($144.5m) in Auckland showed the ongoing popularity of flagship office properties and strong occupier fundamentals. Both properties sold to offshore purchasers with yields in the low 5 per cent range.
Not to be outdone, the industrial sector is riding on a high with the $70m-plus Visy manufacturing and distribution facility sold by our Highbrook and Hamilton offices for a sub-5 per cent yield. This deal has arguably re-rated price expectations and demonstrated the long-term positivity and strength of the sector.
Despite testing conditions, excellent opportunities in the retail sector keep emerging. An exemplar is the sale of the Hoyts EntX complex in Christchurch that sold for $48.8m and a yield of 6.5 per cent.
In Auckland, the full opening of Commercial Bay’s three-level retail precinct in the first half of 2020 will be a major milestone. The flagship development on the water’s edge is tipped to redefine retail in the CBD.
Demand for high quality retail space has grown significantly in the past few years, given the explosion in residential, worker and visitor population. There will be something for everyone with more than 100 retailers split between 30 per cent for major retailers, 45 per cent for speciality retail and 25 per cent for food and beverage.
Another standout in 2019 was New Zealand’s $42 billion sovereign wealth fund (New Zealand Super Fund) entering the hotel sector by co-investing in a portfolio of hotels owned by the Russell Group and Lockwood Property Group. This $300m investment represents the single largest hotel transaction in New Zealand history. The recent expansion announced in December 2019 with the purchase of Holiday Inn in Rotorua signals there could be more to come in 2020.
The number of financial, economic and legislative disruptions the property sector has dealt with confidently in 2019 is testament to the sector’s resilience.
Global politics, slower economic growth and a New Zealand election in 2020 will likely test the sector’s resilience again. Past experience and positive leading economic indicators suggest we can be cautiously confident in the outlook. There is a lot to look forward to.
Solid employment and low interest rates will continue to be key positive influences on the market. The OCR is expected to remain the same or lower in 2020, but the possibility of higher lending margins in 2020 signalled by the Reserve Bank and major banks could entice owners to sell and take advantage of the strong gains made in recent years. It may also lead to a number of alternative funding options. Both features could boost activity in 2020.
Our property market sits within a macro environment that sees slow growth, low inflation, low interest rates and a peak labour market. This year, I see more of the same, and New
Zealand is not alone in this respect. We are all learning to invest in a prolonged low yield and low growth environment.
While 2020 is an election year, it is important now to play a long game in what is going to be a predictable interest rate environment for years to come. The commercial property market will continue to provide the means to that objective, and I am particularly optimistic about the prospects for Auckland.
Investor confidence is high, vacancy rates remain at historic lows and the demand for industrial property and housing continues to drive the on-going expansion across the city’s periphery, which in turn is presenting a great deal of opportunity for developers and position-takers. The outlook for CBD and city fringe property remains strong.
To those who may question the historically low yields on offer, I would suggest that it is important to recognise that capital gain is as much a part of an investment yield as the rental return. Market demand makes Auckland a sure bet this year.
The big property news in 2020 will be around major development projects in Auckland. We thought Commercial
Bay was big but I sense bigger things coming and the market has the confidence to push them through. Why?
Firstly, Auckland will remain the principal magnet for occupier and investment demand. Investment follows demographic change, and Auckland continues to evolve rapidly. We are seeing younger and older people’s lifestyle requirements changing, influencing residential demand and housing types.
Retail's not dead — it’s evolving rapidly in response to digital disruption. Sylvia Park and Westfield Newmarket have broadened their offers in response, providing much more than generic destinations - expect much more mixed-use investment.
The America’s Cup will further stimulate the market. As it did during previous defences, the America’s Cup is significant impetus for redevelopment of the CBD, Viaduct and Wynyard precincts. A number of major hotel completions are on track, adding needed supply and the city’s food and beverage offerings continue to improve and impress.
Last year began with uncertainty, and signs of a slowing economy, but, the biggest issue facing the industry was the one that never eventuated – the proposed introduction of a capital gains tax.
This, combined with the OCR drop from the Reserve Bank, has seen the market placed in a much more confident position for 2020.
We are seeing new money coming into the market all the time - money that would have previously gone into the share market or term deposits, but investors are weighing up the risks and increasingly opting for the steady returns and lower demands of commercial property investments.
While limited, the supply of quality new buildings coming on to the market is raising the bar across all property sectors with positive flowon effects being felt country-wide. We expect this trend to continue in 2020 with greater quality stock aiding rising rents across the commercial property market. 2020 promises to be an interesting one, with New Zealand and the US facing elections, which, along with Brexit, unrest in Hong Kong, will potentially lead to disruption on a global scale.
On the local front, the Government enters an election year announcing it will increase infrastructure spending, which is expected to increase economic activity and support high employment rates, while historically low interest rates have led to increasing pressure on funds looking for a home with reasonable returns.
Commercial property has benefited from this, with increased pressure on yields and the demand for property stock. We have seen strong demand for industrial and commercial property across the country and expect this to continue in 2020/21, with demand coming from a variety of sources including property funds (both local and overseas), listed companies, unlisted companies, owneroccupiers, as well as the likes of syndications and private investment.
Auckland, Wellington and Christchurch have led the demand for property stock, setting new benchmarks over the last year for both achieved rentals and yields.
Provincial areas, such as Whangarei, Hamilton, Tauranga, Hawkes Bay and Queenstown are also performing well with the attraction often being the differential in yields that are being offered against the main centres.
Industrial property has been the darling of the commercial property sector and we do not see this changing in the coming year with strong demand continuing for well-tenanted property in sound locations.
The high demand for prime stock could create a flow-on effect through to secondary premises where greater financial rewards could be waiting.
Retail continues to undergo significant change due to the rise of technology and the online presence, and we see no signs of this abating.
We have seen many of the same trends that our US partner, NAI Global, has observed in their market come to the forefront of Australasian retailing. Examples including the rise of retail shops that have both a brick and mortar plus internet presence, as well as the large bulk retail shops that are coming to New Zealand shores including Ikea and Costco.
Industrial property will remain the standout sector in 2020. A lack of development land, unprecedented low vacancy and the ongoing high demand for warehousing will push rents higher and yields lower.
Offshore interest in Auckland property will continue, particularly in CBD office and mixed-use developments. New CBD developments coming to the market over 2020 will provide a welcome increase in available stock.
The completion of Commercial Bay will result in occupier churn and a flight to quality as tenants in B grade buildings move to spaces in A grade buildings vacated by Commercial Bay tenants.
We expect enough vacancy to be created to enable the market to function properly again and pressure on rents may come off a little. However, we’re not expecting a large rent reset as many feared a few years ago.
Retail property will continue to be mixed, with bigger centres thriving and smaller/suburban centres steady or declining.
However, increased confidence in retail property is expected to follow the boost in the housing market’s performance.
Bank capital allocations are resulting in reduced availability of money for residential development, so completed residential stock will receive a great deal of demand pressure and price increases. This will kick off a flurry of activity in the residential market, following a subdued period over the past couple of years.
Macro indicators point to another strong year for commercial and industrial property nationally in 2020 and we expect further growth.
Locally, one factor which will continue to alter the market is the City Rail Link project.
Road closures and pedestrian flow disruption on and around Karangahape Rd will severely impact retailers - and this is already apparent in sales and leasing trends on Karangahape Rd with tenants reluctant to lease space and some landlords looking to exit the area. The long-term closure of Mt Eden Station will also impact local businesses and commercial landlords.
On the positive side, the upcoming completion of several office and apartment developments in the CBD means there is plenty of new stock coming to the market.
A further trend which will continue is the exodus of investors from residential into commercial property.
The stream of buyers coming to us from the Ray White residential network is proof of the attractiveness of commercial property, which offers superior returns and a lower regulatory burden. We are also assisting smaller residential developers who want to move into larger mixed-use projects.