Industrial buildings near the city have become hot property, reports Colin Taylor
KEY POINTS:
While many small Auckland city fringe industrial and warehouse buildings have been demolished in recent years to make way for apartment developments or refurbished character offices, they are still hot properties in their own right.
Light industrial buildings have become a premium product for investors, owner-occupiers and tenants as they scramble to secure a rapidly dwindling supply of what used to be traditional city fringe properties hosting a myriad of small industries.
Ben Herlihy and Hamish West, who are specialist brokers in this area for Colliers International, have identified 650 light industrial properties ranging from 200sq m to 2000sq m in the city fringe suburbs of Parnell, Newmarket, Newton, Eden Terrace, Grafton, Grey Lynn and Morningside. A decade ago, this figure would have been closer to 800.
The two brokers, who have 39 properties for sale and lease in the city fringe suburbs, say most manufacturing and service industries have been forced to move away from the city's immediate environs.
"As Auckland developed, many big manufacturers established operations in the city fringe but spiralling land costs have left many companies in a situation where it is more cost-effective to sell and relocate their operations to the traditional industrial areas of Penrose, Mt Wellington, Wiri and Onehunga or even further afield," says Herlihy.
"If they don't need to be within a few minutes of the CBD, and increasing rents from higher land values are unpalatable, it makes sense to move further afield to areas where operating and car-parking costs are lower."
A number of properties were sold to residential developers taking thousands of square metres out of the market, but West says the credit crunch and the increasing cost of borrowing has sent this sector into a tailspin.
"Many of the properties for sale now are being snapped up by investors and cleaner industrial businesses or companies in the marketing, communications, information technology and distribution fields that require not just offices, but associated storage or light industrial floor space."
The Property Council's investment performance index shows that smaller industrial properties of fewer than 2250sq m have been exceptionally good performers for investors in recent years. In the three years to the end of 2007, investors enjoyed an annualised return of 19.6 per cent. Investors with larger properties of up to 4500sq m received a slightly lower return, although it was still a healthy 18.7 per cent.
Colliers' research director, Alan McMahon, who is also chairman of the council's research committee, says in the same period, New Zealand composite property - all commercial and industrial property tracked by the index - recorded an identical annualised return.
"This shows that investors in smaller industrial city fringe properties can do just as well as the big investment companies who own more recognisable categories of property investment, such as shopping centres and major CBD office buildings.
"And owners of smaller industrial buildings in the city fringe would certainly have done well in the past three years compared with investors in equities, who have received only 10.7 per cent annualised on their investments."
As the supply of city fringe industrial and warehouse/office property diminishes, there is steady demand and scarce supply, despite land values of between $1000-$2000 per sq m. "It is not deterring investors, although family trust investors have dried up," says West.
West and Herlihy have been involved in multiple deals recently, completing six leases in the past fortnight. They sold a 688sq m property at 376 Great North Rd, for Air Conditioning Services, for $1.6 million to an Auckland investor following the company's move to bigger premises at Penrose. Another sale was the 688sq m Tint A Car building at 136 Great North Rd for $1.54 million, representing a 7 per cent yield and a 270sq m warehouse/office property at 6 King St for $740,000, which was purchased by a sign writing company.
"While investors keep on searching for the next deal, some companies are choosing to lease as the economy adjusts to a new phase in its cycle," says West. "Despite some steep rent increases as land values rise, vacancy levels are at historic lows of between 3 per cent and 4 per cent."
Auckland city fringe warehouses are leasing on average for between $120-$150 per sq m and office showroom space for between $180-$210 per sq m.
Among the properties West and Herlihy have for lease is a warehouse/showroom property that will soon be vacant and which has a 5.5 metre stud, roller door access and eight car parks in a high profile location off Mt Eden Rd.
"The 280sq m office/warehouse at 36 Burleigh Street, Eden Terrace, owned by a Wellington investor, is in a patch of small office/warehouse properties, some of which have been converted to character office premises for creative tenants, such as film and advertising companies," says West.
The property is in a mixed-use zone and has excellent parking in an area where there is a shortage and it is renting for $69,000 a year, equivalent to $180 per sq m and $45 a week for each of the car parks.
Three blocks from Ponsonby Rd, the tenant at 8 Murdoch St, Grey Lynn, has outgrown the property and is moving to purpose-built premises at Avondale. The 408sq m property has an air-conditioned office, cart dock access to the warehouse, a roller door and secure car parking. The building is suitable for a number of uses and will rent for $55,000 net a year.
Herlihy says the property sits in a mixed-use zone and is surrounded by light industrial buildings housing signage, homewares, electrical and plumbing businesses.
"The city fringe market has been neglected but specialists can focus on adding value to property decisions made by tenants and owners,' says Herlihy. "By having a thorough knowledge of office/warehouse buildings in the city's fringe suburbs, we are aware of every square metre for lease and properties that could be available in the next few months.'
Herlihy says value can be added to a tenant's business by analysing the company's needs, including location, access, employees' requirements and property affordability.
West says he and Herlihy are dealing with many tenants nearing the expiry of their lease or who are due for a rent review.
"Most are facing a significant rent increase because of the rise in values over the past four years.
"It's a nervous time and, by partnering, we can make a stressful process easier."
