Unprecedented market demand in 2016
Augusta’s two-part syndication of the BDO Centre (where NZME is the largest tenant) involved the sale of 2450 $50,000 investment units.
The commercial and industrial property sector looks set for a strong finish to what will be a record year, says John Church, Bayleys’ national director commercial.
Church says the continued onwards and upwards march of the market this year has been based on a powerful combination of factors.
“A robust and increasingly diverse economy, no longer overly reliant on the performance of traditional agricultural sectors, has outperformed many of its sickly global counterparts.
“This has engendered strong confidence within the business community. In conjunction with population and job growth this has increased the demand for businesses premises and brought vacancy rates down,” Church says.
“The consequential pressure on supply is resulting in rental increases, although with the exception of a few locational ‘hot spots’ these have been fairly modest to date.
“Economic and business confidence also feeds through into investor confidence. This in combination with very low interest rates, and a lack of enticing investment alternatives, is resulting in unprecedented demand for commercial and industrial property.”
Church says sales values appear to be running well ahead of the previous record year of 2007. Revenue generated from Bayleys commercial and industrial sales and leasing transactions from April to September was up 32 per cent on the same six months last year. “This is well ahead of even our most wildly optimistic expectations given that 2015 was a very strong year. Transaction growth has been consistent across all sectors of the market and across most of the country. Offshore investment interest remains high but for the most part overseas purchasers have been outgunned by local investors, particularly for high value investment stock.”
Church says the syndication sector has been a major purchaser at this end of the market with market leaders Augusta and Oyster both launching far bigger offerings than previously undertaken.
“For instance, Augusta’s two-part syndication of the newly branded BDO Centre (in which NZME is the largest tenant) in Auckland’s CBD encompasses the sale of a mind-boggling 2450 investment units of $50,000 each by our Syndications and Investment Products Division.
“However, the demand for the product is certainly there and syndications are likely to remain in vogue while interest rates stay low - although investors may need to accept a further downward adjustment in their returns as cap rates continue to be squeezed by strong competition for high quality properties. Other funds management options also emerged in 2016 with Augusta’s launch of its Value-Add Fund No. 1 and we can expect more diverse offerings in this sector in 2017.”
Looking ahead to 2017, Church says investors need to be cognisant of the fact that most other economies aren’t performing anywhere near as well as New Zealand’s and continue to grapple with major structural issues. Global factors which could impact on the commercial property market include rising bond yields, another financial crisis, long-term economic decline and rising unemployment.
“History tells us we are far from immune to what is happening in other parts of the world. All our major banks are globally owned so any significant, long lasting shift in the availability and cost of bank finance, for example, would have a major impact on our commercial property market, as the global financial crisis [GFC] clearly demonstrated.
“However, our government has established a very different platform than existed pre the GFC - although if we become apathetic or resistant to growth then we will drive our own demise. It’s time to embrace all that is good about the market rather than looking for factors that might bring the walls tumbling down.”