KEY POINTS:
Some commercial property investors are waiting for signs the bottom of the market has been reached before they buy, but that can be a dangerous game, says Peter Herdson, Colliers International sales director, who has just launched a portfolio of 70 commercial properties worth more than $400 million for sale.
Herdson believes some commercial property investors may have lost sight of the cyclical nature of the market.
"When equity prices are declining, larger funds suddenly find that their property assets, which perhaps have a benchmark allocation of 10 per cent, are worth 15 per cent of their portfolio. At some point in the market that can lead to selling of property to rebalance, or to reduce gearing and we are seeing some of that activity now."
Herdson says Colliers' latest portfolio includes many properties that will make good investments for people who still have money to put in commercial buildings and land.
The absence from the market of some of the bigger Australian and New Zealand buyers has provided a chance for private buyers, not dependent on high levels of debt, to make some prudent purchases.
"Private investors, recognising the excellent defensive qualities of commercial property in volatile times, tend to shed shares and buy more direct property.
"They know that rental flow from a commercial property is much more predictable than dividends from equity investments."
Herdson says it's never been a better time to be a small remote country and most of the time "the tyranny of distance" works against New Zealand.
"This country's location and the small size of its economy mean we can't create the scale of investment opportunity, or the liquidity, needed to attract the attention of the wealthiest investment funds or their attendant investment bankers.
"However, the size and relative simplicity of our financial systems have also offered some measure of shelter from the financial storms raging in Europe and the US."
On the other hand, Herdson says New Zealanders shouldn't "kid themselves" into thinking that this somehow makes Kiwis more financially prudent than their counterparts in larger markets.
"Yes, our banks have lent conservatively on residential mortgages, but some investors, developers and secondary financiers have exhibited an appetite for risk-taking and borrowing that would make even Wall Street blush," he says.
Herdson says he has adopted US investor Warren Buffett's assessment that the problem boils down to the widely held assumption that during a housing boom prices can only go up.
Buffett, pointing to previous asset bubbles going back centuries, has said: "While the theory's flaws are all too apparent now, the misconception is understandable. It's a condition of human nature."
Colliers International research director Alan McMahon says these factors are illustrated in the latest Property Council investment index. For the year ended June, the index's overall total return for all the property - office, retail and industrial - was 13.46 per cent.
This is down on previous years and reflects slowing capital appreciation, but still looks pretty good compared with the total return from other assets classes for the same period - the NZX All Ordinaries at minus 20.89 per cent and bonds at 9.05 per cent.
McMahon says: "Recent reductions in the Official Cash Rate, in conjunction with talk of further declines, and predictions of falling 90-day bank rates [with which the OCR is closely correlated], are good news for investors and developers, although overseas debt costs are influential as well."
Colliers International research shows vacancy rates in good retail, industrial, and office locations around the country are generally at low levels, reflecting a continuation of steady tenant demand and the natural reticence of developers to create an oversupply.
"This supply pipeline is likely to reduce further as financiers will demand more tenant pre-commitment than before, rendering some planned developments impossible to bring to fruition. Those that are being built tend to be the best ones," Herdson says.
While fundamental tenant demand remains steady, expectations of future rental growth have reduced, acknowledging the slowdown in the economy. At the same time, investment demand has fallen slightly. In combination, this has led to falling values in most property asset classes.
Herdson says some properties Colliers International has sold in the past few months have been at levels lower than they would have achieved in 2006 or early last year, but vendors have been quick to realise, in this downturn, where values really lie.
"Many properties have sold around the country in recent months, of all shapes and sizes, to buyers who like to invest in something with the potential for some capital gain, unlike money in the bank.
"If we had a rapid falling of the OCR, combined with equally rapid falls in interest rates overseas and a working US Government rescue package, then the local property cycle could turn around quite quickly."
Investors are expected to be quick off the mark to buy the portfolio's arguably lowest risk property. A private investor is selling a new 420sq m Westpac Bank branch and 18 carparks on a 934sq m site on the fringe of Hamilton's CBD by auction next month.
Colliers International Hamilton managing director Mark Brunton says the bank spent months to select the site for the branch on the corner of Lake Rd and Hall St before the lease expired on the premises it has been in for the past 15 years.
"The bank had the option to stay in the existing building but opted to move 86m up the road to a substantially refurbished property."
The bank has taken a new nine-year lease plus three three-year rights of renewal on the northwest-facing corner site. Brunton says the property is ideal for low-risk investors and family trusts.
"The modern building is in a good location and has a worry-free tenant and lease." The auction will be held on November 18.
Another reasonably low-risk investment is a former stately Mt Eden home on a 1219sq m site that has been converted by a private investor into Altar café, which is owned by one of Auckland's leading café operators. It also houses 22 serviced offices and 13 carparks.
The 762sq m house at 465 Mt Eden Rd was built about 1910 and has been restored to return $547,000 a year from the café and 14 tenants in the 22 A-grade offices.
Altar Café has 10 years to run on its lease and the office tenants between two and five years. Herdson, who is selling the property with colleagues Paul Jarvie and Frida Andersson, says the quality property is within walking distance of Mt Eden shops. The property is being sold by private treaty closing on November 19.
St Laurence Properties is selling its convenience shopping centre at 613 Great South Rd, Manukau. Situated on a high-profile corner site at one of the busiest Manukau intersections, the 4197sq m centre on an 8006sq m site has 23 specialty stores and 202 on-site car parks, returning $915,455 a year.
The tenants include Fruit world, Mad Butcher, Pizza Hut, TAB, a food court, restaurants and various other outlets.
Colliers International corporate sales broker John Green says the property was built in the 80s and after reconfiguration in 2003 it now contains 15 retail tenancies ranging in size from 72sq m to 506sq m, a food court with nine shops, basement retail premises and signage.
"Most of the shops are in the main development, but there is a standalone restaurant, with frontage to the Great South Rd that is tenanted by Pizza Hut and MC Roast.
"The property has five vacant retail and food court outlets and there is potential for rent of about $1.3 million a year. Operating expenses for the centre are about $262,000 a year, of which $187,000 is currently recovered from the tenants."
The centre, says Green, benefits from being close to the expanding Auckland University of Technology site, the Countdown outlet just opposite and the new motorway connections that will be finished at the end of 2010.
