Behemoth year breaks buying record

Nick Hargreaves, managing director of JLL (left) & Justin Kean, head of research at JLL (right).

Last year appears to have broken all records in the institutional commercial property market across New Zealand, says property consultancy JLL announcing the results of the agency's latest research.

"It was an absolute behemoth of a year totalling $5.1 billion for institutional transactions - more than doubling the 2013 figure and the largest total when compared with all other property sector volumes in the New Zealand market," says Nick Hargreaves, managing director of JLL.

"Bolstered by large volumes of international capital, the value of institutional transactions for 2014 dwarfed the previous record and topped the market activity of the last investment cycle pre the global financial crisis [GFC] in 2006. The question for the market now, heading into 2015, is where will the market go from here?"

Although transaction volumes for 2015 have remained robust so far, global property experts at JLL doubt the New Zealand market will see the same level of transactions achieved this year, given the role that large portfolio sales played in the 2014 numbers.

Hargreaves says JLL researchers tracked transactions over the $5 million mark in 2014 and noted they grew by 143 per cent over the previous year. "The numbers show that the majority of last year's sales volumes were derived from three key transactions: Canada's Public Sector Pension Investment Board (PSP) purchasing the AMP Capital portfolio; and The Government of Singapore Investment Corporation (GIC) entering into a joint venture with Goodman Property Trust and also with Scentre Group, the trans-Tasman Westfield mall owner."

Justin Kean, head of research at JLL says these underlying transactions showed significant growth in 2014.

"However, rather than investors attempting to purchase property, there was a distinct trend toward portfolio transactions which comprises a different rationale than an investor just wanting to buy a building.

"The nature of portfolio moves like that undertaken by GIC, are opportunity driven. These strategic capital plays involve buying and holding an asset while looking for a clever exit strategy that enables them to recycle their capital or sell into the public market.

"But pension fund investors like PSP and Deka Immobilien are looking for somewhere to park their capital where it will generate income and yield in the long term. Their motivations are to take advantage of New Zealand's solid yield profile which offers significant advantages over an international investment environment that is plagued by record low yields and limited potential for capital value growth.

Kean says JLL does not expect to see a repeat of these very large-scale transactions in 2015. "This is not a case of the amount of capital decreasing but rather, it is more a case of suitable stock not being available in markets like Auckland to enable these transactions."

"Investors will need to go outside Auckland and outside of the core market sector in order to make transactions happen," Kean says.

Hargreaves says JLL sees a potential for other key markets around New Zealand and the trend that is already evident in sales figures. "This year will see investors step outside of their traditional focus - moving away from premium A-grade assets to lower A-grade and B-grade assets. Investors will need to take on leasing risk, refurbishment risk and seek stock in locations they have not been to before."

Hargreaves says regional areas have experienced an increase in institutional transactions and saw a record performance in plus $5 million transactions in 2014 with large sales being completed in areas like Hastings, Tauranga, New Plymouth and Taranaki.

"This shows investors are moving up the risk curve to secondary properties and value-add opportunities," he says. "Capital that is usually focused on Auckland is moving to regional areas creating this buoyant market.

"Likewise Wellington had its best ever performance in history in 2014 with a doubling of sales volumes."

JLL Research says Auckland remains the most active market with 70 per cent of all these transactions while Wellington had 13 per cent and Christchurch 7 per cent.