Returns stabilise as peak fades
More signs suggest the commercial property sector has passed the top of its cycle, although a crash is not on the horizon.
Property Council chief executive Connal Townsend said the deceleration was to be expected given an extended period of exceptional growth.
The market appeared to have peaked late last year, ‘‘and what we are moving into now is a prolonged period where returns will likely stabilise’’, he said.
‘‘Overall, the New Zealand commercial property sector is still performing well, given the trend towards deceleration of growth and yields internationally.’’
Some listed property companies, such as Goodman Property Trust, have begun reducing debt levels given the trend.
Quarterly figures from property index manager MSCI and the Property Council show that in March, New Zealand commercial property made a total return of 10.4 per cent, a 2.5 per cent decline compared with 12.6 per cent in June last year.
However, total returns were still well above the 10-year average of 8.5 per cent.
Industrial was the strongest performing category, returning 13.7 per cent, followed by office at 10.0 per cent. Retail was the weakest at 8.2 per cent.
The shortage of central office space in Auckland was evident in the city’s turbo-boosted office return rate of 13.5 per cent.
Wellington’s office market was much weaker, partly due to the effects of November’s Kaikoura earthquake on occupancy. Office returns were 3.2 per cent, and retail returns were also below the national average at 6.2 per cent.
Bryan Reid, vice-president of MSCI’s global research team, said New Zealand’s commercial property sector was stablising in line with global trends.
‘‘There is an emerging deceleration trend across international markets and across the world where income returns are getting squeezed and income yields are coming down,’’ he said.
‘‘When we look at the results in their entirety, relative to other global markets, New Zealand still has an appealing yield position.
‘‘For example, Japan, US, UK and Canada sit much lower than Australia and New Zealand, at around the 4 [per cent] to 4.5 per cent net operating yield. Globally, the overarching trend we have seen is that industrial continues to thrive and is the best performing market. In contrast, retail is the weaker performer.’’
Reid said this could be attributed to rapid changes in consumer retail behaviours that are beginning to impact brick-andmortar stores.
Globally, New Zealand’s net operation income yields are among the highest in the world at over 6 per cent, compared with between 4 per cent and 4.5 per cent in Australia, the United Kingdom, the United States, Japan, and Ireland.