Commercial property leaders upbeat about 2016

5:00 AM Saturday January 16, 2016 Colin Taylor

Auckland real estate agency chiefs see a positive year ahead for the commercial property market

Without exception the leaders of major commercial property agencies and business brokerages are upbeat about the year ahead. 

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“The market will remain buoyant in 2016 with little downside risk evident over the longer term,” says John Urlich, commercial manager of Barfoot & Thompson. “Predictions for our domestic property market firstly necessitate a view on global economic conditions,” he says. “The world markets have softened and there is little optimism in Asia or Europe where both trade and investment remain low.

“The consequence for us here is that interest rates will continue to remain low with the potential for a further interest rate cut in what will be a steady but unspectacular domestic economy in 2016. Yet our higher yields and our relative strength to global markets means that foreign and immigrant investment will continue to look to New Zealand as a desirable market.

“Couple continued low interest rates, with our dollar remaining at a low to the Chinese Yuan, and the demand in Auckland in particular for commercial investment property will remain highly competitive.”

Urlich says the Auckland market is underpinned by low vacancy rates and new development is not keeping pace with demand. “As a consequence the office and industrial sectors will continue to see increasing rental levels. This in turn will fuel the remarkable demand we currently see from owner-occupier businesses which have added to the price premiums of smaller commercial and industrial properties. The market for retail space will remain consistent in what will be an average year for retail spending - only truly superior retail properties will see increased competition and rentals.”

However, Urlich says the development sector will be “most interesting” in 2016. “The development potential of both bare land and brownfields sites is becoming an increasingly specialist topic. The increase in the costs of construction and the need to consider the ever changing characteristics of design will make this sector more challenging. Design build driven industrial development will feature more prominently and we see land subdivision becoming an increasing characteristic of the market as Council services start coming on line further out. Auckland will expand and outlying territories like Silverdale, Hobsonville and south of Takanini will see still more development.”

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Mike Bayley, managing director for the Bayley Corporation Ltd, also believes that many of the favourable market conditions that contributed to a record year for the commercial property market in 2015 will remain in place in 2016.

“Interest rates are predicted to drop even further by most economists, with the Reserve Bank expected to reduce the overseas cash rate to unprecedentedly low levels and hold it there for much of 2016. This will make commercial property even more attractive for investors facing miserly returns from bank deposits and bonds. It also means leveraged investors can take advantage of very low borrowing rates to obtain excellent returns on equity.”  

Bayley says the consequences of this is that local and offshore investor demand can be expected to continue to outstrip supply and, in combination with rental growth, push values up further this year.

“There is phenomenal international interest in New Zealand, and in particular Auckland, property at present,” he says. “Chinese investment interest will remain strong, but we are expecting increasingly significant inquiry out of other parts of Asia, such as Indonesia and India, as well as from Europe where cash rich investors are looking for alternatives to their own insipid markets.

“We are also anticipating a surge in activity and a greater range of opportunities in the syndication and managed property funds sector in 2016 with the likes of Augusta launching a diversified add value property fund. These new offerings will fill a void in the market for private and corporate investors looking for greater returns on equity.”

Bayley predicts that growth areas in Auckland in 2016 will include the northwest where huge development is occurring from Hobsonville to Westgate; the western side of the CBD with the development of the convention centre and the Wynyard Quarter; and in South Auckland where residential development in areas such as Flat Bush, Takinini, Papakura, Drury and Pukekohe is creating new commercial and industrial opportunities.  

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Mark Synnott, CEO of Colliers International, says that 2015 was a record year of sales volume, low vacancy rates and yields and he sees little reason for that trend to change heading into 2016.

“Two key features will underpin the confidence and demand in the commercial property market for the next 12 months: historically low interest rates and population expansion,” he says.

Synnott says population growth was a key tenet of his predictions for last year and he says it will remain a driving force behind major commercial developments in 2016.

“New Zealand’s net migration gains show no sign of letting up, and population – specifically in Auckland – will provide the impetus for more major commercial developments.”

Record low yields will also feature again in 2016, purely because of demand, says Synnott.

“There is a lot more investment money available than investment properties. The record low CBD office and industrial vacancy rates in Auckland will continue as an acute barometer of this trend.”

Synnott says the residential market is also placing greater focus on density to alleviate demand and price pressures, and this will increase the attractiveness of quality apartment projects such as Alexandra Park. 

“As predicted last year, New Zealand’s commercial property market is still only seeing the beginnings of the ‘great wall of money’ on offer from China. The sheer weight of capital available from Asian investors who want to find a home for it in international markets is massive, and New Zealand is an extremely attractive location.”

Synnott predicts activity within the retail property sector will also be very notable in 2016 – particularly coming off the back of significant momentum late last year where Colliers’ capital markets team transacted a record billion dollars in sales in less than six months, anchored in the main by Westfield shopping centres ($549 million) and Countdown supermarket ($287 million) sales.

Synnott also sees a strong case for ‘tourism becoming the new dairy’.

“New Zealand is currently seeing a major tourism boom, with more than three million international visitors visiting our shores for the first time in a one year period. This represents an 8.1 per cent increase on the previous twelve months, and our hotel property market is reflecting that.

“Colliers Hotel division is witnessing the first stages of the next transaction cycle with more than $290 million in sales recorded in 2015 - up a staggering 500 per cent over the same period in 2014.”

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Nick Hargreaves, managing director of JLL, predicts an ongoing influx of international investors.

“We believe that globally, pension funds will continue the search for yield - meaning they will continue to chase alternative assets. We will therefore see international institutional buyers considering New Zealand as an investment destination. We can also expect high net worth’s, particularly Asian development players, will come to New Zealand for a diversification play.”

Hargreaves also expect the demand from international retailers will continue to rise in Auckland this year. “The outlook for the retail sector remains positive, met with a solid level of demand from international retailers who are seeking prime space for their brands.”

Development will “charge on” in relation to industrial space,” he says. “There is a significant shortage of industrial stock in Auckland and with limited solutions in the market the only choice for a wide range of tenants is to develop new space and pay the rents to justify this.”

“This is the year that Auckland turns into a construction site. There will be huge disruption to the urban framework with construction commencing on the City Rail Link [CRL], Downtown Shopping Centre, SkyCity convention centre and potentially several other residential construction projects.”

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Brent McGregor,  senior managing director for CBRE New Zealand, sees a combination of low interest rates and both on-shore and off-shore heavy-duty capital availability further driving strength in the investment market – “although local economic conditions have moderated slightly, moving into 2016”.

He says quality Auckland stock has been tightly held for the past 18 months, but in 2016 some private investors who acquired during the global financial crisis (GFC) period will be tempted to sell.

“Offshore groups will continue partnering with local fund managers and institutions, and the attraction of Auckland to large scale Asian and European investors will endure. Barring a global event, I suspect we might see the first large property transaction touch the 6 per cent benchmark this year,” McGregor says.

“Core-plus assets across the country’s main centres are set to outperform other asset classes, with yield compression in Wellington, and rental growth, in Auckland, which is being pushed along by the low vacancy levels for prime buildings.

“High levels of industrial supply are forecast for 2016 and the demand dynamics are telling us the residential development opportunities should continue with the main question marks being: construction price inflation which has been material in 2015; the impact of the 30 per cent equity rule for investors; and the new offshore investor regulations.”

McGregor says demand for prime office space in Auckland CBD will be high, as more options become available. “Property assets surrounded by good infrastructure and amenity will perform better than isolated properties, as company executives are taking the requirements of their staff and customers more seriously when contemplating the strategic location of their businesses.”

He also believes a strong number of international businesses, particularly retail brands are, and will continue to look to make their first move into Auckland – “showing it is becoming a truly world-class city”.

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Bruce Whillans, managing director of Whillans Realty Group, agrees 2016 will replicate last year’s bull property market. “Capital flowing from China, improving business confidence, surging migration and a low New Zealand dollar all point to another exceptional year for Auckland’s commercial real estate market,” he says.

“Investment from China will be one of the key drivers for 2016. Weaker economic growth in Asia is forcing Chinese insurance giants, corporate developers and billionaire class property investors to diversify outside the region – and many of these groups are turning their focus to the US, Australia, Canada and New Zealand.”

Across the Tasman, Chinese investment into Australia’s commercial real estate market has shifted from traditional high-net-worth privates to billionaires, and now, major institutional investors. Insurance giants, sovereign wealth funds and developers, including; Greenland Group, Chinese Investment Corporation (CIC) and Sunshine Insurance Group, are beginning to dominate the Australian marketplace, competing with local REITs and developers for trophy office towers and prime CBD development sites.  

“We are beginning to witness a similar sea change in New Zealand with several significant Chinese investment groups, many of whom are already active in Australia expected to enter our market in 2016,” Whillans says. “China’s biggest property developer, Greenland Group is building the tallest residential tower in Sydney and is now actively looking for its first project in Auckland.”

Whillans says it’s easy to forget the New Zealand dollar has actually lost a quarter of its value against the Chinese RMB since June last year. “From a wealthy Chinese investor’s perspective, our commercial property market looks pretty affordable, particularly once you overlay our comparatively high office and industrial yields to those found across Asia and in Australia’s capital cities. 

“In turn, this injection of liquidity will stimulate local property investors to commit to new projects and re-invest their proceeds into the market,” says Whillans.

Faced with a shortage of suitable development land and investment stock, land values and yields will continue to firm over 2016. However, low interest rates and robust rental growth will still deliver local investors, particularly property syndicators, attractive leveraged returns.

Whillans also factors population growth into the backdrop “which is running at historic highs, and underpinning demand for commercial and industrial space”. He points out that in 2015, Auckland’s population grew by 45,000 people - equivalent to adding a city the size of Nelson. “With the region already facing record low office, industrial and retail vacancy rates, and supply often taking years to respond, 2016 will be another year for the record books,” Whillans says. 

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Greg Clarke, general manager of NAI Harcourts, echoes the opinion that all indications for the year ahead point to continued strengthening of an already strong market. “Economic stability, interest rates at record low levels and strong demand right across the country from both investors and owner occupiers paint a rosy picture for 2016,” he says.  

“As a brand, NAI Harcourts is experiencing impressive growth with several new offices planned for the Auckland region in 2016. Through the NAI Global network, there is considerable interest from overseas purchasers attracted by what is seen as a safe investment environment, and this activity is expected to increase.”

Clarke says that his agency has the benefit of being a national organisation that is able to monitor activity across the country. “And we are seeing an increasing trend for investors to look outside of Auckland. Yields in the regions can be as much as 2 per cent higher, even for properties with well-known brand tenants on long leases.”

He says competition within the airline industry is making it very cost effective for Auckland-based owners to travel around the country either looking to purchase or to check on their investment.

Despite the huge price increases in the Auckland residential market in the past 12 months, Clarke says the underlying truth in commercial property is that sensible decisions remain the order of the day.

“Occupancy costs remain an important factor and are likely to continue to dictate value, however as the Proposed Auckland Unitary Plan [PAUP] implementation draws ever closer, change of use and development potential creates opportunities that were previously not considered viable.

“The bottom line is that the year ahead is expected to be even better than 2015,” says Clarke.  

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Paddy Callesen, Savills joint managing director, says the heated property market party is not over yet. 

“With falling interest rates, strong migration flows, low vacancy rates, increasing rental rates and falling yields the property market is still running hot.”

Strong capital flows, particularly from Asian funds, will continue to compete with local institutions for the city’s higher valued property assets,” Callesen says.

“At the lower value end assets will continue to be aggressively sought after by local private investors. Institutions will continue to use this strong market for ‘churning’ their lower valued assets as they reposition into higher valued assets.”

Callesen says investors will continue to chase yield. “While commercial property is just one of the many asset classes people invest in, property will continue to be a more attractive yielding asset than either shares or bonds.”

A lack of suitably zoned industrial land will continue to see Auckland’s cost structures the highest in Australasia for some time, but higher rents and compressed yields are starting to make speculative development economic again.

“Strong migration flows have had a big effect across all property sectors and it will continue to inflate demand for retail, industrial, commercial and hospitality assets.

“New road and rail transport infrastructure will open up new geographical locations for intensified development,” Callesen says.  “However, problems will remain with providing the stormwater and sewerage infrastructure for new developments.”

The difference in this property cycle, says Callesen, is the lack of vacancy which “should ensure tenancy retention risk profiles will be much lower than we saw in property cycles at a similar stage in the last three or four cycles.”

He believes this year will be a good time for sellers who have had a problem property to divest at an acceptable price.

In terms of new office product Savills sees two or three major CBD office development projects being confirmed and some speculative development in the industrial space as prime vacancies hit zero.

“The market will remain in reasonable balance as long as investment values do not significantly outstrip replacement value,” Callesen says.

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Layne Harwood, managing director of Knight Frank, says the Auckland CBD office market above $40 million, can expect to see continued interest from offshore corporates with the challenge being the availability of quality stock. “The lack of supply at the premium end will force buyers into the A-grade and sub A-grade market or to look to mixed composition commercial, larger strata and leasehold tenure. Prime yields for pure commercial office will stabilise on average at 6.5 per cent, but those with a strong retail offering will potential get to 5–5.25 per cent.”

Harwood says qualified, corporate buyers will be prominent from Europe and the USA, as they seek defensive global investments. “There will be continued interest from Hong Kong and Singapore, however, they are still likely to be value buyers in the main. Auckland will continue to be favoured over Wellington in the office sector and Christchurch activity will increase but at a local level.”

He sees the infrastructure and motorway system upgrades in Auckland being a significant influencer on Auckland’s industrial market. “While the traditional areas of East Tamaki and Mount Wellington will continue to be popular, Wiri and the Airport will become more dominant and with a move south to areas such as Drury in the search of larger land blocks and better value. The accessibility of the new northwest locality will mean more tenants will consider these locations, given the new motorway Waterview Connection.”

The influence of the PAUP, shifting staff catchment areas and the opening up of new or repositioned satellite town centres such as New Lynn and Ormiston will also have a significant impact.

“The new hotspots will be Wiri, Takanini, Mangere and Hobsonville,” says Harwood. “Major institutional developers will intensify speculative development programmes with rents to increase but prime yields will stabilise at 6.25-6.5 per cent for prime above $10 million. Those owners who have good quality B grade property – post 1985, should expect a firming of yields as owner occupiers and those looking to reposition obsolescent assets, drive the market for sub-prime”

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On the business brokerage front heads of two major agencies factor ‘Baby Boomers’ into their assessments for 2016. Steve Smith, managing director of Affiliated Business Consultants (ABC), says it’s easy to sit back and reflect on what has been a steady ride for 2015 - with 2016 promising to be just as buoyant with forecast low interest rates, positive net migration flows and continuing growth in the New Zealand economy.

“In addition to this positive outlook, we are seeing Aucklanders using their increased property equity to move to the provinces to acquire business opportunities and enjoy lifestyles unattainable in the busy metropolis,” he says.  

This migration from Auckland will see increased economic benefits to the regions. “Furthermore, the hot topic over the past few years has been about our Baby Boomers, who are starting to move on to the next phase in their lives, and planning their exit strategies. They now understand the reality that succession planning to their children may be just a dream, as in many cases these offspring will choose the OE experience, or their own independent path.

“With this change in mind-set we are actively engaging with these clients and foresee an increase in a greater number of successful, long established businesses coming to the market.”

Smith says exiting a business, or purchasing a first business, requires clear thought, focus and planning. “Often the Christmas/New Year break is the catalyst needed - but we are entering a strong sustainable market for both sellers and purchasers alike and the outlook hasn’t looked as strong since 2006-2007.”

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Aaron Toresen, managing director of LINK Business broking, anticipates that 2016 will bring considerable activity to the area of business sales in New Zealand. “Our expectations are that it will be the strongest year in a decade for the numbers of transactions. On the buy-side of the equation we have: interest rates at historic lows, strong immigration, significant numbers of unsatisfied existing purchasers, increased demand from offshore buyers who are looking at growth through acquisition and aggressively engaged well-funded private equity firms looking for industry roll-ups.

“On the sell-side we have the well documented “Baby Boomer” phenomenon bringing record numbers of retiring business owners to the market, the real signs of which we are only really seeing now. With this unusual combination of strong demand and strong supply we would expect to see a vibrant business sales market, heralding the beginning of what will be one of the largest transferences of wealth in New Zealand history.

“With over 30,000 SME businesses[small and medium enterprises] with between five and 50 employees currently owned by “Baby Boomers” - who will exit in one fashion or another over the next 10 years - significant numbers of transactions will occur. Many of these transitions will of course occur through internal mechanisms such as selling to partners, family or management, but a considerable number will occur as an outright sale.

“This year will be a particularly good time to sell a business in New Zealand and we expect to see savvy business owners identifying that opportunity,” Toresen says.

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