Property chiefs gaze into crystal ball

Tenant retention will remain a feature of the office leasing market this year. Photo / Supplied

Leading executives in commercial property agencies remain guardedly upbeat about investment and leasing opportunities in several sectors of the market for this coming year while warning about the ongoing impact of restricted credit and high vacancy rates.

"While there are plenty of underlying reasons to feel optimistic there are still a few dark clouds on the horizon," says Richard Horne, CB Richard Ellis's senior managing director in New Zealand.

Horne says there is a feeling the commercial property sector has not seen the full extent of the pain that was anticipated at the beginning of 2009. "It was a difficult and hard year but there wasn't the 'blood on the floor' that characterised the early 1990s recession."

He says the banks helped by working with clients over property funding problems and the relatively low gearing of property trusts prevented a slew of fire sales. "The hope is that this will continue."

From a sales point of view, Horne says the biggest issue is the availability of debt and the volatility of swap rates for properties selling for more than the $10 million.

"For well leased and tenanted properties valued at less than $10 million there have been some record yields at auction. At the other end of the scale it has been harder to identify New Zealand-based buyers with the necessary equity and banks that will lend on lumpier assets."

Optimistically, he says the signs are pointing to a return of on-shore institutional buying by the second quarter of this year. "Foreign investment was limited last year but a weaker New Zealand dollar and more attractive yields will also attract buyers from across the Tasman and Asia. New Zealand's Asian buyer market has been active and prominent at auctions. We anticipate this will continue to be a fertile investment area for that market."

Horne says commercial leasing is in for a tough period, with increasing CBD vacancy rates. "Landlords will be aggressive in attracting new tenants and retaining existing clients. The pressure will ease as business confidence builds and flows through to the leasing market, as it has done in Sydney.

"The ability to retain and attract tenants will be the key to future cashflow. In this respect, active property management will continue to be important."

Horne believes development activity could pick up this year as land values drop to reach affordable levels. "The roadblock remains funding and the ability to pre-lease to reasonable levels."

He predicts a tough year for property professionals, who can understand value. "For some there will be rich pickings. And it's not going to be a market for newcomers and amateurs."

Horne says the formation of an Auckland Super City and the hosting the Rugby World Cup in 2011 will "provide a tonic for New Zealand in the next two years when the woes from the recession should be behind us".

Chris Bayley, general manager, commercial and industrial, for Bayleys Real Estate, says retail property was the stellar performer in a challenging commercial and industrial property market in 2009, "and we expect that will continue to be the case in 2010".

"It is likely the current insatiable demand for retail property, underpinned by a strong local Asian component to the market, will continue unabated in 2010, particularly as the economy picks up again," Bayley says.

"While vacancy rates have increased across all sectors of the market, retail has been less affected than office and industrial property. Yields for well located and tenanted retail property have held steady, with prime offerings still selling at capitalisation rates of less than 6 per cent."

On the industrial front, Bayley says the firm's industrial teams have seen an encouraging increase in inquiries from companies seeking warehouse space in anticipation of greater business activity in the first half of 2010.

"However, vacancy rates, and hence rentals, are likely to continue to come under pressure in both the industrial and office markets," he says. "Tenant retention has been a major focus of the Bayleys property management team this year and skilful, proactive asset and tenant management will be the key to minimising further capital value erosion in 2010."

At the higher value end of the market, listed property entities are likely to continue selling property to private investment companies and offshore investors chasing counter cyclical opportunities. Bayley notes that offshore entities were the purchasers in two of the largest office building sales in Auckland last year. "We are expecting strong overseas investment interest, particularly out of Southeast Asia, to be a feature of the market this year, especially if the Kiwi dollar stabilises or eases back.

"Overseas buyers are now focused less on yield and more on capital retention, with New Zealand seen as having less capital value downside than many other international markets."

Bayley expects the current 2-3 per cent yield differential between prime and secondary property to be maintained in 2010 as a risk averse investment market prevails. All yields, however, may come under upward pressure in the latter part of 2010 if the Reserve Bank raises interest rates as forecast. "Property owners anticipating selling in 2010 might therefore want to consider doing so in the first half of the year," he suggests.

"We expect to see higher than average receivership and mortgagee sales maintained in 2010 as problem loans continue to be addressed, offering opportunities for cashed up investors. "While banks and financiers are back lending, their conservative loan-to-value ratios will constrain development and land sales activity."

Mark Synnott, managing director of Colliers International foresees sale and leasebacks, which were a feature of the 2009 year, continuing "or even increasing" as corporations look to redeploy capital into their businesses.

"We will see a number of big name brands go through this process this year," Synnott says. "The macro situation is that in 2010 listed and unlisted companies will continue to rationalise balance sheets and raise equity. Assets which are not cashflow-producing will come under greater pressure for sale, particularly land assets which have no income attached."

Ironically, the term "land banking" could take on a new meaning as banks end up owning more land.

On the positive side, it seems confidence is slowly returning to business and there are signs that the New Zealand market has been through the worst of the valuation declines with balance sheets generally in check.

"So we would not be surprised if some listed property trusts started signalling they should perhaps begin capitalising on lower asset prices by selectively acquiring again," Synnott says.

"However, we doubt we'll see any Australian corporates or listed trusts coming back into the NZ market in 2010 in a substantial way. Equally, high net worth prospects in Asia, who are largely yield-driven, are limited at this time."

He anticipates that 2010 will therefore see the continuation of private investment dominating acquisition, with the potential re-emergence of some institutional money in isolated cases. And larger transactions - anything over $100 million in value - will remain few and far between due to a limited local appetite and offshore markets largely absent except at unrealistic yields.

Synnott believes "green" will remain fashionable, with companies trading up to green buildings, such as NZI did this year and thinks the office leasing market will bottom out in 2011. "So we have 18 months to go there yet."

He says land will never be cheaper and neither will construction costs, resulting in some design building projects getting off the ground in the industrial market.

Another feature of hard times is a trend for tenants to fund developers. "We could see more of this next year as major companies partner with developers to satisfy their companies' occupational and business growth requirements." A dampener on the market could be interest rates which are likely to go up, Synnott says.

John Urlich, city commercial manager for Barfoot & Thompson, says 2010 is likely to be marked by continuing negative pressures on both vacancy rates and the performance of secondary commercial properties. "However New Zealand has avoided the worst of the global crisis and the past year saw the emergence of the first 'green shoots' of a recovering economy.

"We tend to agree with many astute investors that this downturn does not mirror that of the early 1990s, and the outlook for counter cyclical investing in 2010 is increasingly positive," Urlich says.

"Increased confidence, pent up demand and positive net migration has us believing we will move in step with the global environment, and grow gradually but consistently over 2010 and 2011."

In the interim, a combination of underperforming assets, overly committed tenants, continuing mortgage borrowing constraints and interest rate pressures will combine to produce an increased supply of commercial properties for both sale and lease.

This could result in risk adversity and negative sentiment among many investors but the same conditions will spell "opportunities" for purchasers that are both determined and conservatively geared.

"We believe that despite the favourable leasing market conditions, astute managers and business leaders will do well to consider purchasing property at present," Urlich says.

"All in all we are picking a consistent yet improving property market for 2010."