KEY POINTS:
Major agencies predict a cooling of some sectors of the commercial property market, an investor preference for premium properties and a difficult year for developers.
Mike Bayley, managing director of Bayleys Real Estate says he expects little or no easing in prime investment property yields in all value categories.
"Low vacancy rates for prime office and industrial property provide the opportunity for continuing good rental growth," he says.
"The main cautionary factor is the potential for offshore markets to be further affected by the sub prime mortgage fallout and wider economic issues in the US and further afield.
"The investment sector is certainly going to be characterised by a flight to quality. As a consequence second-tier investments will continue to be penalised by investors."
Bayley believes a decreasing demand for secondary properties will also see a decrease in prices.
"As it becomes more difficult to finance acquisitions and the second tier debt market virtually disappears, cashed up buyers will take pole position in the market," he says.
"Traditional developers who have relied on mezzanine funding together with pre-sales and lease commitments will find it an exceptionally tough year. Leveraged property owners sitting on land or non income-producing property may also start to hurt quickly. With the Reserve Bank clearly indicating it is unlikely to ease interest rates in the short term, many potential owner occupiers in the office and industrial sector will opt to lease instead as a result of high debt costs."
Bayley believes yields on prime retail investments are likely to "flatline" although vacancy levels will remain low. "As vacancy starts to increase in secondary strip retail locations, rentals and values could start to suffer. New convenience and semi-bulk retail property may experience a slight easing in rentals as a result of softer retail spending."
On an upbeat note, Bayley says tourism numbers are forecast to stay high in 2008 and he is predicting good growth in niche tourism properties and businesses, and those in the mid- to upper end of the value range.
The famous phrase "irrational exuberance", was attributed to former US Federal Reserve chairman Alan Greenspan, says Mark Synott, managing director of Colliers International. "But it is now conspicuously absent from the commercial property market, and that's not such a bad thing."
Synott says that the markets have calmed, investors are careful, property at the right price is still selling, but the riskier investments that rely on mezzanine funding are dropping in value or are coming on to the market as distressed sales.
"Vendors have to face the reality that the commercial property market has changed and an ill wind is blowing through the development sector," Synott says. "Over the past six years buyers have been chasing vendors expectations but the boot is now on the other foot. The disjoint between vendors and buyers expectations has resulted in a 5 per cent to 15 per cent gap on what a property is expected to fetch - apart from prime properties which have retained their value.
"Confidence in property has undoubtedly been knocked in some quarters by the collapse of 13 finance companies over the past 20 months. The biggest effect has been the drying up of mezzanine funding. Only eight months ago as many as five funders would be chasing the same deal, whereas developers are now chasing the funders. We believe in the next couple of years there will be more syndication of property with cash (equity only) or very conservative gearing."
Synott says the power is still with the landlord in the commercial leasing market, particularly at the top end. "The market has not quite peaked as there is a shortage of prime space and little or no speculative development overall. Rents are now only at the same level they reached in the late 1980s before they halved in 1992 - a 15-year hiatus."
Anyone who thought green buildings were a passing fashion will be proved wrong but it's clear environmentally sustainable design is here to stay, and an outstanding performer that shows no sign of slowing down is retail centre development, particularly as Australian brands are coming to New Zealand.
John Urlich, manager of Barfoot & Thompson Commercial says the "flight to quality" has been the norm as both investors and occupiers pay premiums for the best offerings.
"We don't foresee any change to this trend over the next year. This will continue to accentuate the two-tiered nature of the market that has been a feature in recent years.
"The Reserve Bank is winning," Urlich says, "but we foresee interest rate pressure remaining throughout the first half of 2008 so the year will provide the greatest opportunities to the well-capitalised investor.
Urlich says institutional funds remain positive on property and still have large volumes of funds seeking investment opportunities. "Australian institutions in particular remain focused on our markets as they and other offshore parties seek the higher relative yields New Zealand offers."
He expects private investors to be "cautious", basing decisions on land and building fundamentals, and increasing time on the market. "But we will continue to see a strong property performance in 2008".
Richard Horne, senior managing director for CB Richard Ellis, forecasts a slight softening of the market in 2008, "although we expect to see strong sustained demand from occupiers given the general health of the economy. This should suit savvy investors who are currently sitting on equity and have the necessary expertise."
Horne says there are real concerns that a downturn could set in, with a flow-on effect from the sub-prime and credit crises in the US and now Europe. The optimistic view is that New Zealand is well placed for growth and will be "ring-fenced" against possible negative sentiment - primarily due to the resource sector boom in Australia, which is likely to continue, and the commodities boom here.
"Combine this with a buoyant share market and the prospect of a continued flow of capital via Australian compulsory superannuation, and the positives are likely to outweigh the negatives."
Horne believes the main issue for New Zealand is interest rates. "With the average cost of debt at over 9.5 per cent, justifying sub-8 per cent yields relies heavily on rental growth prospects." He hopes the prospect of hosting the Rugby World Cup in 2011 will give politicians and councils a much needed focus to improve Auckland's infrastructure "which is currently another factor holding Auckland back.
"This is a world class city," Horne says, "but unfortunately the basic infrastructure is sub-standard."
