Offices struggle as houses boom

By ANNE GIBSON and PHILIPPA STEVENSON

House building boomed in the final quarter of last year but commercial construction was slow and there remains too much office space in Auckland.

Statistics New Zealand figures for the period show that after adjustment for seasonal variations, the value of residential building was $1.19 billion, an increase of 22.4 per cent on the September quarter and 25 per cent higher than a year earlier.

The department says the size of the increase should be treated with caution as it contains a large, irregular component.

It says its trend series may be more reliable, but even that shows the increase in house building in the December quarter was 14 per cent.

By contrast, the value of work put in place for non-residential buildings was $804.4 million in the December quarter, a 9.9 per cent decrease from the September quarter and 2.1 per cent up on a year earlier.

The lack of demand for new commercial buildings is reflected in the latest L. J. Hooker Auckland commercial property market monitor, which shows the amount of vacant Auckland office space is reducing slowly and rents are still flat.

The monitor shows that vacancies in prime areas dropped from 15 per cent in 2000 to 13 per cent in June last year and that the city has more secondary than prime accommodation for its office workers.

The report, produced by forecasters BIS Shrapnel and Hookers, says the city still has an oversupply of office space that has resulted in flat rents.

Auckland, which has more than 1 million sq m of office space, had a vacancy rate of only 11 per cent around 1996, but building activity since then has led to increased vacancies, the report says.

"Demand was reasonably robust in 2000 but this was the year the Royal & SunAlliance building was completed and as a result vacancies rose further, to over 15 per cent.

"However, they appear to have peaked during 2000."

Meanwhile Westpac Trust's quarterly Agribiz publication has warned that prices for farm land could be at risk due to falling farm incomes.

In line with other recent forecasts, WestpacTrust is predicting farm incomes will fall this year after two years of spectacular levels, although they will still be reasonable.

Bank economist Richard Sullivan warns that current agricultural land values seem to be based on the unusually high commodity prices of recent years and cannot be justified over the long-term.

Recent conversions and new entrants were not only paying high prices for the land but were borrowing significantly to buy it, Sullivan said.

Farm debt levels in livestock and dairy farming had risen 30 per cent between 1998 and 2000.

"If incomes fall, the ability to service debt falls," he said.

"While interest rates are low this may not cause major concern.

"However, any interest rate increases will create a further squeeze on profitability" and the capital structure of farm businesses could be undermined.

He said that because of this, "some financial prudence may be advisable".

WestpacTrust said it was forecasting the New Zealand economy's growth rate would be above 2 per cent this year.

As a consequence the kiwi should continue to gain value and interest rates rise, but by smaller amounts than in other countries.