Industrial market faces positive perfect storm
Aerial view of Rosebank Rd, Avondale .
New Zealand’s industrial property market is experiencing a “perfect storm” that will boost competition in 2015 and especially for the prime industrial sector, says Chris Dibble, national research manager at Colliers International in his latest New Zealand Research Report.
Dibble says trends coming together that make the market friendly “storm” comprise a robust economy, low interest rates, lower fuel prices and a development pipeline that is yet to stem demand.
“The economy is the best it’s been in years for the industrial sector. Vacancy rates are at an all-time low in Auckland and a five-year low for Wellington and Christchurch. This demand environment is a significant positive for investor cash flow,” says Dibble.
“It is being buoyed by Auckland residential growth, Wellington’s growth and Christchurch’s earthquake rebuild.
“This confidence is driving owner occupiers and investors to rally when purchasing property - pushing yields lower.”
He says Colliers International’s investor confidence survey also reached new highs at the end of last year and a large chunk of this was due to the optimism in the industrial sector.
Seventy-four per cent of respondents were confident in Auckland's industrial market performance over the next 12 months - the highest figure since the Colliers’ survey started in 2006 and a response that outpaced all other sectors and locations across New Zealand. Wellington’s investor confidence was also the highest it has been at 16 per cent with Christchurch remaining high at 57 per cent.
Dibble notes that interest rates are cyclically low and early indications in 2015 suggest they are likely to be lower for longer.
“This is a major factor as to why industrial sector investors are re-rating their risk margins. Average prime industrial yields pushed below 7 per cent at the end of 2014 - the first time in our 20-year historical time series.
“However, interest rates remain comparatively lower than in previous cycles, enabling investors to bid higher while achieving similar returns over interest rates as experienced in early 2000 and early 2003.”
He cites the margin between average prime yield and an indicative cost of debt (90-day bank bill rate plus 2 per cent) as 3.3 per cent at December 2014. “This is well down on the record 5.6 per cent gap recorded in the market lull of September 2009 but still sizeable.”
Dibble says both investors and owner-occupiers have bolstered the market’s exuberance. “They are confident that industrial property, especially in Auckland, is a solid bet at current margins.”
The extraordinary decline in fuel prices since the end of last year is another catalyst that could benefit the back pocket of industrial property investors, he says.
“Savings at the fuel pump will be a major benefit for the transport and storage sector with the sharp declines likely to be unexpected for many and not factored into budgets. This has the potential to reduce some pressure on slim margins for 2015, boosting bottom line results. This will in-turn benefit tenants, which investors will be keenly aware of.”