Time for value investing again - Bayleys’ chief
In a post-pandemic world where spiralling inflation is pushing up interest rates and people seem reluctant to give up their comfortable workfrom-home lifestyle, can commercial property still be an investment worth pursuing?
“Absolutely,” says Alan Haydock, director of Bayleys’ Auckland City & Fringe team and Bayleys’ top commercial and industrial agent in New Zealand for its 2021-22 financial year. “Now is an opportune time to adopt a value investment approach and lock in future upside while the market is softer.”
Value investing, made famous by billionaire Warren Buffett, involves taking a long-term view of a desirable asset; waiting, and then buying when the market is underpricing it, says Haydock. A particularly good time for this type of investment strategy is when short-term uncertainty creates a temporary discount on asset prices.
In the future ‘new normal’, though, do companies really want to pay for a swanky downtown office? Can’t we all just continue working remotely from our kitchen tables? Not quite, if overseas trends are anything to go by, says Haydock.
“Companies may offer their workforce more flexibility now than they did prior to the Covid lockdowns but many have also come to appreciate just how important the office really is in relation to their productivity, innovation ability, and company culture.”
Haydock has noticed that more and more businesses are choosing to upgrade to higher quality premises with modern interiors — a key aim being to entice staff back into the office. Location remains important, but proximity to amenities valued by staff (such as eateries, gyms, and public transport) now matters most. This shift is creating some uncertainty and movement in the Auckland market.
“When market volatility and uncertainty are high, it’s important to factor in the risk margin that is appropriate for you and establish a plan B for your investment in case a tenant decides to leave unexpectedly. In the short term, we are operating in a market where tenants have plenty of choice – and increasingly high expectations.”
Office vacancy rates have risen across Auckland during the pandemic, making it important to consider the true replacement value of a tenant, Haydock says. While many companies are looking for an A-grade building and are willing to pay a premium for it, the rental gap between top and lowertier buildings is widening.
So, what to do if you own an older office building and are worried about vacancy? “Fortunately, this situation has created an opportunity for value-add investors to upgrade welllocated but tired office assets to a level where they meet the new Environmental, Social and Governance (ESG) requirements that companies are increasingly being expected to measure themselves on. Then capitalise on the A-grade rental margin.
“We are also likely to see more Auckland CBD office properties being redeveloped into luxury apartments – a trend that is on the rise across the US, where many prestigious city centres were transformed into virtual ghost towns during the pandemic.
“Downtown Auckland didn’t fare much better, yet perhaps should be called an early adopter having already embraced this high-end trend with the Pacifica Tower and International apartment complexes. Other notable projects and hotel developments may well inject further new life into our sluggish city centre.”
With the exception of value-add and conversions, Haydock doesn’t see much scope for office rental growth in the short term.
“However, when the next economic cycle commences, we expect to see good medium to longterm gains. The rental market is likely near the bottom now and properties with good fundamentals should recover when the economy picks up again.”