Commercial property momentum rolls on
Auckland continues to provide the lion’s share of sales activity in New Zealand.
The momentum driving New Zealand’s commercial property market shows no sign of nearing an end, says a new report by the Capital Markets team of Colliers International contained in the agency’s third portfolio publication for the year.
Released to the market yesterday and entitled Global Reach, the agency’s 52-page portfolio magazine features listings covering all commercial property sectors including industrial, office, rural and retail offerings.
Peter Herdson, Colliers’ national director of Capital Markets, says the title acknowledges the growing strategic significance of Colliers’ worldwide networks.
“As New Zealand becomes more attractive to offshore buyers looking to invest in our commercial property, our ‘global reach’ and overseas network becomes more important,” he says.
Herdson says the new portfolio listings range from a sale-and-leaseback investment property on a large 2.6 hectare East Tamaki site housing a well-known New Zealand company; through to a lake view hotel development site in Queenstown.
“Typically, property cycles in New Zealand have lasted seven to 10 years, with varying degrees of severity when they change,” says Herdson.
“But, as Colliers’ research shows - and as our directors are seeing ‘on the ground’ - we are now about to enter a new pattern of activity, rather than approaching a cyclical peak. We are far from the risks of an overheated or euphoric market, and we believe that an extended pattern of buoyant investment activity is likely to continue,” he says.
“Our New Zealand brokers are already aware that more than $2 billion of commercial sales is settling - or is likely to settle - in 2016 with individual price tags of $20 million or more.
“We expect 2016 is likely to eclipse 2015, reaching close to $8 billion,” says Herdson.
The latest report says the past year has been a big one for Colliers’ Capital Markets division – “which transacted a whopping $1.696 billion worth of deals” in the 12 months to May 2016.
“This is a huge volume of sales that reflects an extremely buoyant commercial property market that is showing no signs of slowing down.”
Herdson says Auckland continues to provide the lion’s share of sales activity in New Zealand, accounting for 37 per cent of all commercial sales activity by number of transactions.
“This is a reflection of Auckland claiming about a third of the population, economic activity, employment, retail spending and residential property sales.
“The aggregate value of Auckland’s commercial property sales in 2015 was the second highest recorded at $3.9 billion, representing 53 per cent of national sales value while Wellington recorded its best ever year in 2015, reaching just over $1 billion of sales activity for the first time.
“New Zealand property returns are at the highest level in the past eight years of which Christchurch accounted for 14 per cent of national sales turnover last year, with a total value of $752 million,” Herdson says.
“Almost two-thirds of sales activity by value and of the number of sales was in the industrial sector. Signalling the continuation of the Christchurch market recovery, the office sector had its best ever year with $132 million of sales.”
Wellington recorded its best ever year in 2015, reaching just over $1 billion of sales for the first time.
John Goddard, a Capital Markets director responsible for most of Colliers’ offshore sales transactions for the last 20 years, says the demand for commercial property across all price levels will be spurred on by key investment factors..
“We are seeing continued support for purchasing activity due to domestic economic expansion; balanced property demand and supply fundamentals; asset appreciation from cash flows; and unprecedented purchasing demand.”
He says other motivating factors are: “debt-leveraging and positive debt to yield spreads, a rally in local investor activity, and offshore purchasers seeking flagship assets”.
In its latest report the Colliers’ Capital Markets team lists 10 key reasons why it believes “the market is far from a downturn”:
- Global economic risks are well defined;
- The Reserve Bank of New Zealand and credit agencies continue monitoring and mitigating risks for financial instability;
- Investors are not overconfident or overcommitted;
- Sales activity is justified on current economic and property fundamentals;
- Asset values are appreciating modestly from positive cash flow and capital returns;
- New Zealand yield levels are still higher than many major overseas markets;
- The spread between debt costs and property returns will remain lucrative for longer;
- There is limited political risk and high levels of transparency;
- There is a positive demographic environment for commercial sales activity now and in the future, and;
- New Zealand is increasingly becoming a globally attractive, more liquid property market, increasing the depth in the transaction market.
Goddard says the balance between onshore and offshore purchasing activity normalised in New Zealand in 2015 with local purchasers dominating offshore purchasers.
“Typically offshore purchasing activity was below 15 per cent of overall value and below 10 per cent of the number of sales as mirrored in the 2015 results.”
He says offshore investors continue to prefer the office sector “although they have stepped up their position in the retail sector recently as opportunities have arisen”.
“Last year was the year of the listed property vehicles (LPVs) rather than offshore purchasers. LPVs accounted for $600 million of purchases from 13 sales compared to offshore purchasers for $435 million from 17 sales. Private local investors continued to dominate in all the categories.”
In terms of investment drivers - after property fundamentals and economic growth – asset appreciation was signalled as the third most important feature of a real estate market in the latest Colliers International Global Investor Sentiment survey, Goddard says.
“The key to the most recent uplift in values over the past few years has been the rise in cash flows from rent increases combined with firming cap rates.
“In a review of major cities in the US, Europe, Asia, Australia and New Zealand, prime average commercial office, retail and industrial yields in Auckland, Wellington and Christchurch were typically higher than many global counterparts.
“The ‘lower for longer’ inflation and interest rate environment; the weight of money chasing limited prime stock in New Zealand; and the positive economic and property fundamentals; signal further yield firming, rising rents and asset appreciation.”
Peter Herdson and John Goddard of Colliers International.