Top 10 commercial property predictions for 2018

7:55 PM Friday December 1, 2017 Mike Bayley

An artist’s concept of the exterior of The Grove - Sylvia Park’s new multi-million-dollar dining precinct. Photo / Supplied

New Zealand’s commercial property market performed well this year, but with interest rates likely to rise next year (albeit from a record low), and finance an ongoing issue, will the market continue to enjoy the prosperity of years past?

Here are 10 top commercial property predictions for 2018 by Bayleys managing director Mike Bayley.

Amazon Shake-up  

New Zealand’s retail sector will be forced to upgrade in response to Amazon’s arrival in Australia. Regardless of whether Amazon establishes an actual outlet in New Zealand or not, it’s presence will be felt. Bayley says the smarter bricks and mortar retailers will evolve into a blend of “grab it now” and “have it delivered” outlets while smart digital retailers will invest in physical stores.

“Demand for warehouse space will also increase as retailers shift their focus to fulfilment. Warehouses will begin to assume some of the characteristics of stores as more retailing activity starts to happen inside distribution centres,” Bayley says.

“Third party logistics businesses with good distribution channels or specialist services will benefit but competition – for business and for warehouse space - will intensify. Infill locations, close to consumers and key infrastructure, will be in hot demand.”

Malls to look like resorts

Malls will shift their focus from retail and aim to become resort-like places where consumers go to relax, eat and be entertained rather than shopping.

Revamped malls will grow outwards and upwards. Box-like buildings will be a thing of the past, as malls transform in mixed-use centres, offering, not only hospitality and entertainment developments, but also office accommodation.

An example of this is Kiwi Property's expansion plans for Sylvia Park, which include a new $9m dining lane, an $80m office tower, a multi-level carpark and a new fashion galleria.

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Food halls like Sylvia Park’s new The Grove food precinct, will grow in significance – artist’s impression.  

Cash is King

Income performance, returns and cash-flow will be crucial in 2018. Property managers will be under pressure to work assets hard. Finance will also be more difficult to obtain, as the retail banks become more conservative in their lending.

Those with the funding will be able to make the bold moves but even the big players are beginning to realise there is more value add in redeveloping their existing stock, rather than buy new property at a tight price.

Rates to rise but remain low

Most economists believe the Reserve Bank will lift the official cash rate (OCR) – currently at a record low of 1.75 per cent – but there is some disagreement on when. The prevailing view is the end of 2018 or 2019, but if the US Federal Reserve lifts its rates, that could influence the Reserve Bank to move earlier. The Government’s spending plans could also put pressure on the Reserve Bank.

However, inflation is still low, so any lift by the Reserve will be small so as not to upset the economy.

Follow the infrastructure

Bayley says new developments will be based around new population nodes and transport infrastructure. “Existing transport hubs will be ripe for intensification.”

Kiwi Property is betting big on this with its recent acquisitions in South Auckland. It has a 20-year plan to develop as a town centre three “greenfield” sites, totalling 51.3ha, in Drury, next to the junction of the Southern Motorway, Great South Road and the North Island main trunk railway line.

Bayleys says that in the Auckland CBD, interest will pick up in areas around the new and revamped stations on the $3.4 billion City Rail Link. “Precinct Properties construction of the $850 million Commercial Bay tower and shopping centre across from Britomart Station is an example of this. The Government’s plan to build light rail lines from the CBD to Auckland Airport and West Auckland will provide possible new nodes for developers to target,” he says.

“In Wellington and the Hutt Valley, Transmission Gully and the Expressway are providing the supporting spine for new activity and satellite hubs. The infrastructure will allow easy access to the city, the port and the airport and provide opportunities for logistics companies,” Bayley says.

Office balancing act

New Zealand's office sector continues to command strong prices and attract attention, but there are some noticeable differences between the regions.

Last November’s earthquake removed, temporarily or permanently, about seven per cent of Wellington’s office stock. Vacancy in the city is at a record low but demand depends on seismic strength ratings. Buildings that are seismically sound are going to be in demand, pushing rents up, but buildings that are seismically challenged will create a two-tier market.

In Christchurch, additional office supply has increased the sector’s vacancy rate, which has been climbing over the last 12-18 months. As leases signed immediately post-earthquake approach their termination dates, competition between CBD landlords and their city fringe business park counterparts is likely to intensify. The next two years will see a rebalancing of the city.

Demand for prime office space in Auckland CBD is still high, driven by a growing office worker population and high business confidence. Where there is vacancy, it’s in B and C grade buildings on the edge of the CBD. Sales activity will continue at current levels but the signs are there will be a slowdown in development, as the industry looks to rebalance and consolidate after a strong build period.

Another challenge for the sector in 2018 will be backfilling older offices. As more new or upgraded stock come onto the market, second tier tenants may not need to spend all that much extra to secure accommodation in a new, Green Star-rated building. Alternatively, there may be a move by landlords to convert older space into new uses.

Industrial strength

High levels of occupier demand have made industrial property a highly sought-after investment asset as evidenced by the fact that it comprised 56 per cent of commercial property sale transactions in 2016 in the country’s largest market of Auckland.

Total returns from industrial property have averaged 12.4 per cent annually, ahead of retail (10.9 per cent) and office (10.6 per cent).

Compared to other asset classes, there’s more stock available and at a better price point - although bidding is competitive. It doesn't require much in the way of property management and there's more potential to add value. 

Hotels are hot

New Zealand is well on its way to achieving its goal of growing annual tourism revenue to $41 billion by 2025. But to keep growing, New Zealand needs more hotels. The huge increase in visitors to the country has seen demand for hotels spike and existing accommodation stock falls well short of projected visitor numbers.

Recently announced new hotel developments and the refurbishment of existing hotel stock will ease pressure. For owners of secondary CBD office stock, this could be an opportunity to sell at a good price to hotel developers.

Food the new anchor tenant

Food halls featuring hip restaurants, new food sensations and fast casual outlets will grow in significance. Landlords are fast realising that a well-stocked food hall can attract large numbers of shoppers, particularly millennials, who are keen to spend big on food experiences, says Bayley.

“For mall owners, there are other upsides. Food tenants usually take on longer leases than other retailers and food is viewed as ‘internet resistant’. Some analysts believe that the food experience can make or break a new retail development, arguing that food can now act as an anchor tenant.”

Golden Triangle becomes a Diamond

It’s been the one to watch for some time now, but the geographical Golden Triangle of Auckland, Hamilton and Tauranga is where the best commercial and industrial property opportunities lie, says Bayley. “It’s where about 50 per cent of New Zealand’s population lives and its economy is still growing. But 2018 is the year when triangle morphs into a diamond as the positive effects of that growth extend north to Whangarei and beyond.

“Population growth and an increase in residential construction activity is expected to boost Northland’s commercial and industrial property sector over the next two years. More benefits will flow from major upgrades to State Highway 1, which will reduce travel times south, to Auckland and key freight locations such as Hamilton and Tauranga.” 

However, the game-changer for the region could be the possible relocation of Ports of Auckland to Northland, Bayley says.

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Mike Bayley, Bayleys’ managing director