China syndrome pushes ‘meteoric’ land prices

9:38 AM Saturday January 24, 2015 Colin Taylor

The Auckland Star Site at 28-32 Shortland St, (bottom centre) currently a parking lot, which was purchased for $26 million by the Chinese Heng Chaung Investment Group Ltd last year.

Driven by overseas interests and mainly offshore Chinese buyers, Auckland’s CBD land values have experienced “a meteoric rise” surpassing their 2007 peak, says Brendan Keenan, senior analyst with Ray White Commercial.

“Chinese investors have also been very active in buying industrial and commercial land elsewhere in the city and particularly in Albany,” says Keenan.

He says Ray White Commercial alone sold 2.6 million square metres of development land last year with much of it to resident Chinese or Chinese companies entering the market.

“The focus for most of these buyers has been on residential land with subdivision potential or land suitable for more intensive residential or apartment development. In many cases significant premiums are being paid for consented land, creating attractive margins for packaging development.

“Conrad Properties, for example, purchased a 1265 square metre site at 35 Albert St for $11.5 million earlier this year, equivalent to $9091 per sq m,” Keenan says.

“In the deepest darkest days of the global financial crisis in early 2009 the same site sold for $7,256,250 or $5736 per sq m. At the height of the last bubble in late 2007 the site sold for $12.25 million or $9683 per sq m.

“Other examples include the Auckland Star site at 28-32 Shortland St that was purchased in mid-2009 for $8109 a square metre by its former Korean owners Dae Ju. This site sold last April 2014 with approval for a 26 level residential tower for $26 million or $12,935 a square metre to Heng Chaung Investment Group Ltd which is reported to be planning to develop the site into a high rise apartment building.”

Keenan says Asian investment in Auckland’s CBD is nothing new but he believes “the flood of capital coming from ‘mainland’ China [the People’s Republic of China] is unprecedented”.

“The reasons for this inflow reflects what is going on in China internally and what New Zealand has to offer.”

He says the Chinese government’s crackdown on corruption aptly named ‘Operation Fox Hunt’ along with debt-fuelled property bubbles in China and the liberalisation of the yuan, have become compelling reasons for high-net-worth private investors and Chinese companies to diversify out of their own country.

“Add to this the recently introduced restrictions and the fact that quota limits are already being reached for countries like Canada and the United States for Chinese investor immigration schemes, New Zealand is seen as an extremely attractive destination. Our clean environment, legal system, protection of property rights, and our relatively cheap cost of housing and education system are key draw cards for many of these groups.”

Keenan says Chinese investors, while sophisticated, sometimes look at valuing land from a different perspective, which can also push up the underlying land value.

This methodology is also not necessarily the best way of looking at usage and return.

“In the lead up to the last property bubble, land values were being propped up by reverse feasibility studies which looked at maximising the density achievable on a site and then working backwards to determine what they could afford to pay for the land. This in turn drove up the price of land.

“Often these studies turned a blind eye to the realities of underlying real estate fundamentals and demographics - think SOHO Square, Rhubarb Lane, Albany and the Lion Nathan Breweries site.

Auckland CBD aerial.jpg

Aerial view of Auckland CBD where land values have seen a ‘meteoric rise’ .

“It’s interesting to see these sites are now being developed into far less intensive but more suitable and successful projects than first proposed. The bigger the development, the less impact the proportion of land has on the overall project cost - or so the theory goes.”

Keenan says a similar, albeit simpler approach is being employed by many offshore buyers today to analyse the land on a cost per square metre gross building floor area rate.

This method eliminates the extreme variances in CBD land prices by applying a land rate to the total potential building area permitted under the District Plan - rather than just the site area - but this approach has its pitfalls.

“If land is assessed on maximum density, rather than market reality, it doesn’t automatically mean the land value makes financial sense. Just because a 40 storey tower can be built on a site, it doesn’t necessarily mean the market can absorb this.

“Chinese investors are used to large populations and are applying these practices to sites in the city, creating schemes which would not be out of place in a city like Shanghai. Whether these projects get off the ground is yet to be seen.

“Many groups are looking to claw back the premium they are paying for development sites through cheaper building materials and the supply chain networks they have in China, which local developers just don’t have. Other groups are simply land banking these sites, with the expectation that land values will continue to rise.”

Keenan says that if the rate of foreign investment seen today continues to flow into the Auckland property market, it will be interesting to see the results a year from now.

“Ray White Commercial expects to see CBD land and apartment values continue to climb, but at a slower rate in 2015, and the true reflection in growth will only really be seen when a significant level of new apartment stock comes online between 2016-2017 and the market is able to see what re-sale values are being achieved.

“There is grain of truth in the adage ‘no one ever makes money buying off the plan’. It can be a bit like musical chairs when it comes to CBD apartments and land values with those at the tail end of the cycle facing the most exposure,” Keenan adds.   While apartment values have ramped up over the last two years, they have plateaued in the last three months. “But they are really only recovering from the global financial crisis and now stand at their pre-global financial crisis peak. The same is true for land values.”

He believes it is unlikely there will be a risk of oversupply like the one experienced in the early the 2000s because he says many of these new entrants from China have no intention of developing their sites, while others lack the resources to actually commence their projects.

“In addition, the rising costs of construction and competition for resources with the rebuild in Christchurch, plus the lack of mezzanine funding and, paradoxically, the cost of land are putting a collar around new development which will keep supply in check.

“It is encouraging, however, to see experienced local developers like Manson TCLM, Willis Bond and Conrad committed to new residential projects in the city, underpinning the current confidence.”

True Commercial - Brendan Keenan, Ray White Commercial.jpg

Brendan Keenan, senior analyst with Ray White Commercial; “The flood of capital coming from ‘mainland’ China is unprecedented”.