Boom's big impact on industrial property

Within Auckland's established industrial precincts there is very little vacant development land. Photo / Supplied

An eight-year economic 'bull run' across the wider New Zealand economy, immediately following the global financial crisis (GFC), made a major impact on industrial property values, says Ian Little, Bayleys Research manager.

New statistics compiled by Bayleys Real Estate show that as business activity throughout the country continually mushroomed from 2010 to 2018, so too did the per square metre rate of warehouses, processing and manufacturing plants, and factories, Little says.

In 2010, as New Zealand's economy began its post-GFC recovery about 425,200 people were employed in New Zealand's industrial sector across 92,325 business units. By February of 2018 these figures had grown to 514,700, up 21 per cent; and 104,915, an increase of 13.5 per cent.

Little says the economy's eight-year expansion mode has driven high levels of employment growth which has, in turn, has promoted an increased demand for industrial workspace.

"The results across New Zealand have been falling vacancy rates, upward pressure on rentals and a ramping-up of development activity," he says.

"The figures reflect a strongly performing economy which has seen high levels of business expansion and new business creation. The demand for workspace that this has created, has seen vacancy rates across New Zealand's major centres being squeezed down, in many cases to historically low levels.

"These market fundamentals have created favourable investment conditions with stock brought to market attracting high levels of investor interest. This demand has been bolstered by the ongoing low interest rate environment which has seen investors seeking higher-yielding assets, with commercial and industrial property being one of the favoured options.

"The trend has been particularly evident in the 'Golden Triangle' centres of Auckland, Hamilton and Tauranga, along with Wellington. In all locations, average vacancy rates have been trending down over recent years - now sitting at, or below, three per cent across all of the major precincts in these cities.

"Tauranga in particular has recorded steep decline in vacancy rates. In early 2015, the average vacancy rate was recorded as 13.5 per cent. Our latest vacancy survey has the figure at just 2.4 per cent."

Little says it's unsurprising that the property development sector has consequently responded strongly with new-build projects and precinct subdivision over recent years.

"The value of industrial building consents issued in the 2018 calendar year reached $1.4 billion - up almost 20 per cent on 2017 and over twice the total seen in 2012," he said.

Little said New Zealand's industrial investment property sector has continued to generate attractive returns, citing latest statistics released by the Morgan Stanley Capital Investment (MSCI) index. In the year to June 2018 the total return (capital and income) totalled 12.9 per cent, with the sector generating double-digit returns since 2011.

"Looking ahead over 2019, most of these fundamentals will remain in play pointing towards another positive year for the industrial property sector," he says.

"Competition for industrial investment assets is likely to be bolstered by an increase in overseas interest as a result of the recent amendments to Overseas Investment Office regulations which have made it much harder for most foreigners to purchase residential property."

However, a shortage of land supply could initiate a 'hand-brake' on growth, Little says. "Within Auckland's established industrial precincts there is very little vacant development land. What there is, now generally commands values which make industrial development financially unviable. As a result, there will be an increasing trend towards more intensified and efficient use of land within industrial precincts, particularly those located close to the CBD.

"In 2018 consents issued in Auckland accounted for 43 per cent of the national total - reflecting the city's position as New Zealand's economic powerhouse. It's likely development in Auckland would have been greater without the constraints on land supply."