Strength evident across commercial sector

5:00 AM Wednesday August 2, 2017 True Commercial

Auckland CBD office vacancy rates have risen slightly to 6.8 per cent in the new June 2017 survey. Photo / Supplied

From a retail perspective, New Zealand is still basking in the after-glow of the America’s Cup victory and a successful Lions Rugby Tour; but away from the sports arena, the wider commercial property market is performing well too, says a JLL Research report.

“The Lions Tour has historically brought in millions of tourist dollars and in 2017 it didn’t fail to disappoint, with red jackets dominating rugby stadiums at every match,” says Tom Barclay, JLL’s associate director of research and consulting.

“While the final numbers haven’t been tallied, it was predicted that this tour would bring in $26.7m to Auckland alone and generate 165,210 bed nights, which pushed accommodation providers to their limits,” says Barclay.

But, although the overriding sentiment for commercial property market is positive, some concerns are evident, he says.

“Interest rate increases and the availability of credit to the commercial property market, remain front of mind; while geopolitical uncertainty offshore poses obvious risks to us as a trade-dependent nation.

“New Zealand has been a popular place to invest of late, particularly with offshore interests.

“Some investors have been removed from the market as access to funding has tightened, although this mainly impacted on local investors operating in the $1m to $10m bracket - and for development plays rather than institutional quality stock.

“Even with foreign buyers are active, the rate of yield compression has slowed throughout the country in response to a bottoming out of interest rates. It is possible that premium assets will see further yield compression with secondary and non-core stock likely approaching a cyclical low point,” says Barclay.

Office market

JLL recently reported that Auckland is a ‘sweet spot’ for tenants. The latest research says this rings true, with a growing number of white collar workers in the city and numerous tenants committing to higher quality space this year to date, predominantly in the prime sector of the market.

Barclay says CBD vacancy rates have risen slightly to 6.8 per cent in the new June 2017 survey, up from 5.4 per cent in December 2016. “This can largely be attributed to refurbished properties re-entering the market along with the completion of some major new buildings, resulting in occupiers like Datacom leaving behind some substantial backfill space. That being said, vacancy is still at historically low levels and, given the limited supply to be delivered over the next 18 months, vacancy is expected to stay tight. Overall the market remains favourable for landlords.”

Rental growth is still present in the market, although this has slowed from the rapid pace of increases observed over 2015 and 2016.

Industrial market

The JLL report says New Zealand’s industrial market has remained strong so far this year, with the BNZ performance of manufacturing index indicating a score of 58.5 in May - its highest level in 16 months and signalling that the manufacturing sector is in growth mode.

Vacancy levels remained fairly flat across the Auckland market at 2.9 per cent of the 10,890,000sq m JLL currently tracks. The North Shore market was the toughest point to enter with a vacancy rate of only 2.2 per cent.

“Substantial new supply continues to enter the market, predominantly in the South Auckland precinct. The persistently low vacancy rates indicate that demand is more than capable of meeting new supply. The pipeline under construction tracked by JLL, exceeds 150,000sq m; indicating the confidence developers have in the strength of the occupier market,” says Barclay.

Investors are active and with their interest comes compressing yields, with the prime average dropping below 6 per cent to 5.8 per cent for the first time, and secondary yields sitting at 7.38 per cent.

Transactions for the year to date have typically been in the sub $10m market, with some acquisitions and disposals by listed sector above this price point.

Retail market

With consumer confidence at its highest levels since 2015, the Auckland retail market has been a strong performer so far this year, the JLL report says. Motor vehicles, food and accommodation proved to be the most popular items on consumers’ wish lists, with the latter indicating that tourism has had a strong hand in this, no doubt helped along by the recent Lions Rugby Tour.

Rental growth has slowed with small increases in the CBD area and bulk retail markets. “Prime locations are performing well, while the dominant regional centres and premium high street retail areas place pressure on secondary retail locations,” says Barclay.

“Higher interest rates and weaker secondary locations have seen yield compression slow for some property owners. A real risk for the retail sector is further increases in rates and any further slowdown in the residential housing market, as these two factors heavily influence retail occupiers through consumer spending.”

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Tom Barclay, JLL Research