Commercial real estate chiefs upbeat about 2015
From left to right, top to bottom: Brent McGregor of CBRE, John Ulrich of Barfoot & Thompson, Bruce Whillans of Ray White, Paddy Callesen of Savills, Nick Hargreaves of JLL, Mike Grainger of Harcourts, Mike Bayley of Bayleys, and Mark Synnott CEO of Colliers International.
Without exception the heads of New Zealand’s commercial real estate agencies are positive about 2015 predicting the continuation of last year’s outstanding commercial property market boom.
John Urlich, commercial manager of Barfoot & Thompson, says “real estate agents, by their very nature are usually beaming optimists”. Looking at the current fundamentals, he thinks agents have every reason to be optimistic about 2015.
“I see us continuing to sit between national and global economic influences that remain polar opposites,” Urlich says.
“Domestically we are underpinned by net migration at historic highs, whilst inflation and unemployment levels continue to be at equivalent lows. The continuing weak global environment will also see interest rates remain at continued lows.
“Opting for floating rates and low yields will continue to be the investment norm in 2015 and, while we are likely to continue to run deficits as global commodity prices remain low, I am optimistic that the portion of the national economy which isn’t ‘dairying’ will ensure steady GDP growth of circa 2.5 to 3 per cent.”
Urlich believes the economy will continue to ensure increased foreign investment, tenant demand for leasing and new development in the coming year.
“Auckland will continue to remain the jewel in New Zealand’s crown,” he says. “Diversifying to the other centres and provinces will again be a comparatively poor portfolio choice. Continued low vacancy rates and demand for land at present will see increased capital values in Auckland next year beyond the national norm. Real growth will extend to the new fringes of South Auckland, Hobsonville and Silverdale.
“We predict good demand this coming year for commercial property options that complements these new locations.”
Mike Bayley, managing director of the Bayley Corporation, says he expects the very strong sales and leasing activity that was a feature of 2014 and which made it a record year for Bayleys, to continue in 2015.
“Demand for commercial and industrial property is outstripping supply and interest rates are forecast to stay lower for longer,” he says.
Bayley believes ongoing offshore interest, particularly out of China and South East Asia, will be focused on large investment properties and development land holdings while a pickup of inquiry out of Australia from high net worth individuals and major development companies is a possibility.
In Auckland’s CBD, the shortage of prime office space will only be partly relieved by the completion later this year of Mansons TCLM’s new office building in Victoria St with strong interest meaning leases are likely to be concluded ahead of its opening.
“Office tenants will by necessity have to look for good quality alternatives within the city centre’s B-grade space, the city fringe, Southern Corridor and on the North Shore,” Bayley says.
“This will open up opportunities and the prospect of rental growth for landlords in these sectors.”
Back in the CBD, momentum should continue to gather in the inner city apartment market with more projects likely - both new builds and conversions of dated but well located office buildings.
“Auckland has an industrial land shortage and there will continue to be strong demand for what limited supply there is, particularly if it has mixed use flexibility. The green light for Stevenson’s massive Drury South business park and the opening up of greenfields’ land in the northwest will take some of the pressure off in the medium term. However, longer term there are significant concerns over whether the proposed Auckland Unitary Plan makes adequate provision for large scale industrial land holdings,” Bayleys says.
Mark Synnott, chief executive of Colliers International, says the current commercial property market is the strongest he has experienced in 27 years in the industry and he expects this growth to continue in 2015.
His confidence comes from the fact the current market is driven and fuelled by equity from high net worth individuals, listed property trusts and offshore investors as opposed to the unsustainable, mezzanine debt driven model from 2003 to 2007.
“This will allow well-funded, good quality property developments that have solid pre-commitments from tenants and owner occupiers to flourish during 2015.”
Synnott also thinks the impact of investment from China will grow exponentially this year (2015).
“We’re currently only seeing the footings or foundations of this ‘great wall’ of money that is on offer from China. The very recent launches in New Zealand of the Bank of China and the China Construction Bank open up a raft of business and growth opportunities here – particularly for the commercial property market.”
Population growth will be another driving force behind the success of major developments in 2015.
“Location, location, location is the catch phrase often linked to real estate, but for 2015 and beyond it will be population, population, population that will underpin the success of massive commercial developments such as West Auckland’s new town centre at Westgate.”
Synnott also predicts Auckland’s skyline will host more than half of the operational cranes in New Zealand by the end of 2015 - a significant increase from its one third share of the 76 cranes operating around New Zealand at the close of 2014.
Looking slightly further ahead, Synnott says the next phase of proposed retail and office changes to Auckland’s Downtown precinct by Precinct will be the most significant development in New Zealand in a generation. “It is the opportunity to finally link Downtown with the Wynyard Quarter, Quay Park and the transport linkages of Britomart.”
The appeal of larger, better quality inner city apartments of the sort to be built by Willis Bond in Auckland’s Wynyard Quarter is a further trend that Synnott thinks will gain traction in the next 12 months.
Brent McGregor, senior managing director for CBRE in New Zealand, predicts a continuation of a number of trends that emerged throughout 2014.
This will include an increasing appetite from offshore investors to commit capital and establish joint ventures and partnerships with local New Zealand investment groups having the property management and development expertise. “This interest will primarily be attracted to larger scale prime assets and development projects,” McGregor says.
He expects 2015 to show further yield compression as risk premiums compress and interest rates remain relatively low. “The value growth of secondary property will exceed that of prime assets as investors chase yield in an environment of greater risk. This trend will buoy up transaction activity in Wellington where yields remain around 100 points higher than in Auckland. The out of town and off shore investors who were attracted to Wellington in the last half of 2014 will continue to selectively acquire assets this year.”
McGregor expects Chinese developer groups which entered the market in 2014 to start developing at scale. “Despite the view that these purchases have been by land bankers and speculators, genuine Chinese developers are also entering New Zealand. Given their recent track record in Australia, Chinese development activity will be residentially focused but some of it will be mixed use with office and retail properties.”
CBRE is anticipating increased levels of speculative development activity, McGregor says. “Low vacancy and demand growth will provide greater opportunities but most of these will be captured by developers who have stock under way or nearing completion.”
On the occupier side, there will be a greater focus on workplace strategy and increasing sophistication by tenants toward driving productivity and efficiency from their premises. “This will have increasingly significant implications for functional building obsolescence and will start impacting more significantly on investors with older less adaptable stock.”
Nick Hargreaves,managing director of JLL, sees a rising market and good market returns, that will encourage investors to ramp up their capital spend within the property and infrastructure sector this year. “This will apply not only on new build developments, but to all aspects of capital spend including redevelopments and conversions,” Hargreaves says. “Investors that capitalise on this window of opportunity over the next 12 months will ensure they stay ahead of the market and those that don’t, run the risk of leaving it too late.”
Hargreaves says rental growth is “guaranteed” to escalate this year. “What we envisage as a direct result of these rental increases is that the really good landlords are going to position themselves to properly maximise returns and the well-informed and properly advised tenants will develop strategies to shield themselves from these increases.”
He believes Wellington has passed the bottom of the property cycle and says international retailers are “circling” New Zealand.
“JLL tracks 100 international retailers, 50 luxury brands and 50 mid-tier brands. Auckland has 18 of these international retailers occupying space in its prime shopping strips which mean there are still another 82 top competitive set retailers who are not yet in New Zealand - so the potential growth for the retail sector this year is huge. We can already see an expansion of these luxury brands in Sydney and Melbourne and anticipate this trend to rise in Auckland this year.”
Mike Grainger, general manager of NAI Harcourts agrees the year ahead is looking to be another big one “following a stellar 2014 year” for the commercial property sector. High levels of business confidence and a favourable economic environment will continue to fuel commercial and industrial activity.
“Auckland is one of the world’s fastest growing cities and immigration is at record levels so we are now witnessing a construction boom with both commercial office and residential developments playing catch up.”
Grainger says one of the biggest pressure points affecting economic growth is a lack of new office space which has been made worse by the conversion of some stock to residential apartments. He concurs with Bayley in stating that “continued pressure on the residential sector will see more commercial buildings undergo residential conversations”.
The demand for well-leased quality properties will continue to remain high and there is likely to be further yield comprehension as interest rates remain at low levels. “Investors are now looking to vacant and secondary buildings as alternative investments,” Grainger says.
“Foreign investment will ramp up further, with demand showing few signs of being satisfied. We will see increased overseas capital inflows and large institutional investors will continue to add commercial property to their portfolios.”
Grainger says confidence and activity in the market is fuelling land purchases. “Developers are looking for projects they can start immediately, with huge interest in land zoned as part of the Unitary Plan, so we will also see purchasers land banking in expectation of values continuing to appreciate.”
Paddy Callesen, joint managing director of Savills believes this year is set to be a continuation of market trends set last year.
“There is yield compression in all sectors, particularly in the $5 million to $20 million range and the trend among buyers in this range has been ‘storer’ wealth – people finding a home for their money,” says Callesen. “Yields are one per cent lower in this bracket than properties priced above $20 million.”
Callesen says Auckland commercial leasing market vacancy rates are continuing to fall because of a lack of supply. “The only new property coming to the market has been pre-committed.” He also expects vacant sites will become inner-city residential apartments putting pressure on commercial development.
Callesen says officerents are still increasing. “Campus-style buildings with incentives offered have resulted in a 40 per cent increase in face rents.”
While rents in the industrial market have increased little, rising land values means hikes are inevitable. “There is a land shortage, little spec building and a lack of stock. Economic rents are still well above market rents, making development increasingly difficult.”
Sales in the retail sector are surprisingly high and the pressure of internet sales on property hasn’t had the effect everyone expected.
In the suburbs, centre-based and convenience retail centres will continue to do well with new developments popping up and strip shopping remaining the same.
Chinese banks setting up branches in Auckland will have a big influence on the property market. “It is a renewal of confidence in our market, and investors and developers buying in the $20 million plus range are always conscious about the cost of money so it is important in deals at this level.”
However, the availability of substantial CBD commercial property for sale will prove to be problem with deals few and far between.
Bruce Whillans, managing director of Ray White Commercial, says rising construction costs and land prices will place a collar around new inner city apartment development, halting the risks of the oversupply situation witnessed at the turn of the century.
“CBD land value growth should have slower capital appreciation next year but this could be offset by more capital inflow from China into CBD land - or what will be left of it.”
Whillans says Chinese investors are now comfortable with New Zealand and are beginning to move away from speculative land deals into more traditional office and retail investments.
“Our falling dollar will make our assets look even more attractive.
Looking at the bigger picture, 2015 will mark the first time that capital leaving China exceeds capital entering China, since the Peoples Republic underwent economic reforms in the late 1970s. This wave of outbound investment is having a direct impact on New Zealand and will continue to do so across 2015.”
Whillans says the CBD office market will continue to be a standout performer.
“The conversion of secondary C-grade D-grade and possibly one or two B-Grade office buildings into residential blocks could have a stronger than expected effect on the secondary office vacancy rate.
“The next significant supply of office won’t be available until the end of this year following the refurbishment of 125 Queen Street into a new A-Grade office tower and the completion of 151 Victoria Street West.
“Big gains are still to be had as yields continue their downwards march and rentals keep rising. Our weaker dollar combined with offshore capital could compound the situation, particularly when office yields across Asia’s main business centres are sub six per cent.”
Whillans says New Zealand is at the lower end of the Reserve Bank’s inflation target zone of 1-3 per cent and the Consumer Price Index has moved just 1 per cent between the third quarter of 2013 and the third quarter of 2014.
“The widening growth gap between Auckland and Canterbury and the rest of the country means the Reserve Bank will have to think carefully before embarking on a rate hike. Any attempts to cool Auckland’s housing market will come at a cost to the rest of the country right at a time when the rural economy is reeling from the steep fall in dairy prices.”