Income performance, returns and cash-flow will be crucial for those in the commercial and industrial property markets in 2018. Photo / Supplied
Colin Taylor asked commercial property leaders for their opinions about prospects for the 2018 market:
I believe 2018 will be the year when the 'Golden Triangle,' linking Auckland, Hamilton and Tauranga, morphs into a diamond.
The 'Golden Triangle' is where the best commercial and industrial property opportunities generally lie. It's where about 50 per cent of New Zealand's population lives and its economy is still growing.
The positive effects of that solidifying growth will extend:
• north through to Warkworth and potentially Marsden Point;
further along the Eastern Bay of Plenty boundary to include Te Puke with its strong •Kiwifruit infrastructure growth; and
•Rotorua with its strong tourism/visitor numbers; and
•Cambridge as a satellite/commuter township of Hamilton, with its growing sporting tourism sector.
Overall, income performance, returns and cash-flow will be crucial for those in the commercial and industrial property markets in 2018; and property managers will be under pressure from owners to work assets hard.
Finance could also be more difficult to obtain for those with lower equity levels on their portfolio, as the retail banks become more conservative in their lending.
Those owners/investors with approved funding though will be able to make bold moves where others can't. Meanwhile some of the corporate players are shifting their focus toward more value-add aspects in redeveloping their existing stock, rather than buying new property at a tight price.
New developments of commercial and industrial property will be based around population nodes and transport infrastructure. Existing transport hubs – particularly in Auckland – will be ripe for intensification and redevelopment.
Tighter Government-driven controls on foreign investment in the residential and rural sectors will likely benefit the commercial sector as offshore investors refocus to commercial property opportunities.
Investors who base their decisions on social-analytics will be keeping an eye on the Government's signalled intention to tighten immigration numbers which would reduce GDP growth and have an impact on business demand for premises.
Most economists believe the Reserve Bank of New Zealand (RBNZ) will lift the Official Cash Rate – currently at a record low of 1.75 per cent – but there is some disagreement on when.
The prevailing view is that this will be the end of 2018 or beginning of 2019.
With the US Federal Reserve lifting its rates at the end of last year, that could influence the Reserve Bank to move earlier.
However, inflation is still low, so any lift by the RBNZ will be small so as not to upset the economy.
Like most investors, if your readers prefer 'routine' over 'interesting' then 2018 will be a good year.
When one ignores the ever-present geo political risks, the state of the domestic and world economies is more predictable than at any time in the last 10 years.
The economic growth rate globally this year will be higher than recent years. Despite some concerns about China, the outlook for our small trading nation is favourable and New Zealand consumers and business leaders will proceed cautiously over the next year.
This 'steady as she goes' approach will be reflected in the manner in which the Reserve Bank will manage the Official Cash Rate where we are unlikely to see any significant movement.
Offshore, however, all central banks are operating to a common mandate.
All will slowly normalise monetary policy at a conservative pace. Rate hikes and inflationary pressures have been well signalled and will occur at manageable levels.
As a result, the availability of investment credit should continue to limit the purchasing ability of many throughout this year and this is unlikely to improve as we see upward pressure on yields and the cost of borrowing through to 2019.
But we temper this prediction with the fact that there remains an acute shortage in the supply of commercial properties. We firmly believe there will be inevitable rental growth across all sectors and particularly in the industrial sector.
Vacancy rates remain at below optimal levels and the costs of building due to capacity constraints in the already pre-committed development sector are likely to do little to improve supply issues.
As December's figures proved, the retail sector will remain steady and mirror the past year, while the office sector will see a necessary increase in the availability of high quality space in the short term as some larger projects come to completion. These developments are setting new norms in both rental rates and the expectations of tenants.
In Auckland the consequent availability of 'back fill' space in older buildings is going to provide opportunities for firms to consider their lease positions.
Well-located industrial property will remain in continued demand and any properties that are centrally located, offer transportation efficiencies, and employee amenity, will continue to represent an excellent investment this year.
We are not altogether as bullish on the re-emergence of offshore investors. Opportunities will exist globally and the reality is that the best current conduit to offshore interest remains our immigrant community.
This previous calendar year we sold six significant CBD buildings at price premiums to 'new' New Zealanders.
The face of direct investment in Auckland is changing and the demand for investments at higher price points up to $100m is significant.
We do not see this trend changing as Auckland remains the nation's gateway city.
A bounce in the commercial property market looks likely after a significant slowdown around last year's election, with the industrial, office and tourism sectors all continuing to show promising signs of growth.
However, uncertainty around the implementation of foreign ownership restrictions may put off some overseas investors, resulting in a shallower pool of buyers at the top end of the market.
We expect on- and off-market sales volumes will trend upwards as vendors look to offload the significant amount of stock that remained unsold during the latter months of 2017.
Corporate owner-occupiers will continue to divest via sale and leaseback to free up capital to invest in their businesses, while significant institutional and private investors will offload non-strategic assets to improve the quality of their portfolios.
The room for further yield compression is small, but still possible in prime assets. However, the major contributor to capital growth will continue to be rental growth, driven by record low vacancies and new supply not meeting demand.
New Zealand will continue to be attractive to offshore investors, thanks to ongoing net immigration and GDP growth, coupled with little likelihood of material interest rate rises.
However, the government's proposed foreign ownership restrictions are likely to create uncertainty until there is greater clarity about what types of assets will be caught in the Overseas Investment Office's net.
We expect this will have the biggest impact at the top end of the market, where the pool of local buyers is shallow. Of the 12 Auckland commercial property transactions worth $50m or more last year, only one was sold to a local buyer.
The property at 2-4 Fred Thomas Drive, Takapuna, was sold by Colliers International to syndicator Maat Group for $60.85m, representing a yield of 7 per cent.
New Zealand's ongoing tourism boom will continue to buoy the commercial property market, particularly the hotel and retail sectors. Visitor arrivals are likely to top 4m this year, after a record 3.7m arrivals in the year to October 2017.
Undersupply continues to be the hotel sector's biggest constraint.
In response, investors have been buying up residential units and renting them out through Airbnb.
We expect a number of councils will follow Queenstown's lead in introducing bylaws to limit Airbnb's negative impacts – notably residential rent increases driven in part by Airbnb's pressure on rental housing supply and affordability.
In the industrial sector, the tightening market will continue to be the single biggest issue.
Rental and land value appreciation will continue, while yields will hold firm as undersupply worsens. Demand for industrial space will increasingly be driven by the growth of online retail.
In the office sector, yields will remain low as new supply fails to meet pent-up demand. Rents will continue to rise from an already strong base; we are aware of rents in excess of $500 per sq m being regularly achieved - in 151 Queen St in Auckland's CBD, for example.
In the retail sector, online competition will continue to be a challenge, but this will be offset somewhat by the growth of food and beverage retail, driven partly by sustained tourism growth.
Shopping centres will continue to capitalise on this trend by curating new dining, entertainment and leisure precincts that emphasise indoor-outdoor flow, such as Sylvia Park's newly-opened The Grove.
In Auckland, the year will be bookended by the closure of the Two Double Seven shopping centre in Newmarket, which Scentre Group is refurbishing and expanding over two years, and the opening of the first retail stage of Commercial Bay in the CBD in mid-2018, with the balance of the centre opening in the first quarter of 2019.
Auckland's undersupply across the office, industrial and residential sectors will continue to have positive flow-on effects for the other centres in the 'Golden Triangle', which is the fastest-growing area in New Zealand.
Hamilton will continue to attract large industrial users, as evidenced by Visy's $100m design-build deal to establish a new plant at Hamilton Airport.
This growth is being enabled by substantial infrastructure investment including Ports of Auckland's Waikato Freight Hub, Tainui Group Holdings' Ruakura Inland Port, and continuing improvements to the Waikato Expressway.
The Tauranga market will be fuelled by growth in the industrial sector with the Tauriko Business Estate continuing to attract substantial industrial users like freight and logistics company NZL Group, which plans to move from Mount Maunganui to a $20m purpose-built facility.
A change in government last year and a shift in policy direction created a degree of uncertainty - but also new opportunities. Following a busy 2017 in the New Zealand commercial property market, we see 2018 being full of opportunity for the investor community.
We expect to see high levels of investor allocation to alternative asset classes including hotels, student accommodation, retirement villages and mixed-use developments as a means to further diversify portfolios.
With two convention centres under construction in Auckland and Christchurch, New Zealand is set to see a whole new tranche of demand from the 'delegate traveller' which will underwrite a number of room nights in both cities while adding some impetus to the surrounding retail nodes.
With international arrivals punching through to 3.68m for the November year (8 per cent growth year-on-year) the flow-on effects for the hotel sector and wider tourism market will be positive in 2018.
Free tertiary education for first year students, which comes into play in 2018, will likely increase demand for student accommodation.
We expect to see an increase in demand for purpose-built student accommodation and corresponding demand from experienced investors wishing to trade in these assets.
In core commercial property markets, we see the weight of offshore capital hunting office assets potentially pushing investment yields lower into record territory for prime CBD stock.
All three main centres have seen offshore investment into prime office assets. With competition tight, expect to see more opportunistic and add-value plays on secondary stock in prime locations.
Industrial property will continue its golden era driven by record low vacancy and a supportive economic backdrop. Auckland industrial property recently hit its lowest vacancy rate since our records started in 1993; a testament to the performance of the sector and the wider economy.
While we expect another strong year for commercial property in 2018, every year has challenges, but through this we evolve.
New Zealand consistently proves to be a resilient country, which will no doubt lead the world as migration changes.
The expected turn in net migration, higher inflationary expectations, evolving development funding models, a new construction cost regime, automation and AI [artificial intelligence], office efficiencies and co-working, the rise of e-commerce and online retailing; will all become bigger themes playing out in the New Zealand commercial property market over the next 12 months.
Given how tightly held core investment product is, we will see a greater focus on alternative investments. Markets will follow demographics – so sectors that align with health, education or age care will provide opportunities to outperform.
Multi-family housing, where entire residential complexes are managed as investments specifically for rental accommodation, will gain a much higher profile and we will start to see concerted investment.
This follows global trends and is perfectly timed as a contributor to resolving the housing crisis in this country and structural issues in the rental market.
Also linked to the New Zealand housing market, the land market will bounce back with stronger activity based on more realistic pricing.
Residential activity might be moderating but it remains cyclically high underpinning demand.
With no new CBD apartment building starts likely in Auckland, product within confirmed existing projects will see prices firming.
Australian based capital will dominate this year in the $100m plus market, in part because their prime markets are even tighter than our own, but also because our Overseas Investment rules aren't as tight for Australian entities as they are for other offshore investors.
While there will continue to be speculation on the effect of e-commerce, on the ground the impact will be seen in benchmark yields for market leading logistics facilities. It would not be a surprise if we see yields below 5 percent for assets that meet international investors' criteria.
Whillans Realty Group believes the outlook for New Zealand's economy and commercial property markets in 2018 will be mixed. The shifting property cycle will open up new opportunities for some and create challenges for others.
For the first time since 2007, the world's largest economies are all beginning to experience synchronised economic growth.
Falling unemployment, rising wages, growing international trade and a coordinated attempt by the world's central banks to normalise monetary policy, all point to gradual interest-rate rises this year.
This poses central bankers with a dilemma. With inflation now evident, do they raise interest rates at the risk of bursting a global asset bubble? Or will deflationary forces like disruptive technology and globalisation continue to keep a lid on prices?
While the Reserve Bank of New Zealand's current monetary policy is relatively accommodating, the Official Cash Rate could be raised in the second half of 2018.
Interest rates are hovering near historic lows and the margins between investment returns and servicing costs remain positive. Any gradual upward movement in interest rates is unlikely to put meaningful pressure on property prices.
The current cycle is still a long way off from the 2006 and 2008 experience, when interest rates were higher than investment returns.
However, it is still likely to be a challenging banking environment for developers.
New macro-prudential rules, rising development costs and weaker residential demand will continue to put pressure on traditional retail bank funding for development projects.
This void will likely be filled by ultra-high net worth individuals, investment banks, and private equity.
Several Australian finance companies are already looking to enter New Zealand early this year. These groups have expressed an interest in funding land acquisitions, development, and value-add projects above $20m.
Chinese investment will likely remain subdued with capital controls making it difficult to transfer funds outside of China together with proposed property ownership law changes by the NZ coalition government this year.
However, offshore investment from Australian, Asian, and European funds will be fuelled by Auckland's strong growth story, our relatively high commercial property yields and the ease of doing business in New Zealand.
Although a lack of sizeable investment-grade stock could be the biggest impediment for these groups.
An accurate prediction of the commercial property market in any year is the 'holy grail' for anybody involved whether it's sales consultants, buyers or sellers.
In the end, all we can do is look to the usual economic indicators and ascertain what would need to happen for the market to change.
The past year has been a particularly good one for industrial and commercial property in the main New Zealand centres and all signs point to 2018 carrying on in similar fashion, albeit with some caution.
Overall, the global economic performance is currently better than most predictions allowed for, so the big hurdles for 2018 are most likely to come from the political arena, whether it's North Korea, Brexit, political upheaval in the US, or continued tension in the Middle East. In the end, no market likes instability.
Closer to home the biggest market hurdle for 2018 seems likely to be tougher credit conditions. With finance more difficult to come by via the major banks, there could well be an impact on demand for commercial property.
The government stance on foreign investment will impact on the appetite for New Zealand investments in 2018, however, this seems mostly likely oriented towards residential property.
The commercial/ industrial market could benefit as investors diversify; though we have noted deals falling over due to overseas buyers being overly cautious due to government policy.
Vacancy rates in the key New Zealand cities will continue to diminish, particularly for industrial stock where supply in key markets such as Auckland is already low.
The other trend to watch is e-retail where international brands, such as Amazon - about to arrive in Australia - could well play a major role in changing the landscape here.
And finally, looking further ahead, the other major initiative that could impact the Northland economy particularly, is the government's election campaign suggestion that Ports of Auckland move to Whangarei. Investigations are underway as to the feasibility.
Overall, the commercial property market has so far successfully ridden out the uncertainty created by the election campaign, and then the election result.
While policy announcements and interest rate changes through2018, may create some pause for thought, the market will remain in a largely healthy state.
Never in the history of the global economy have interest rates been so low for so long and the expectation is that as central banks increase base-rates, interest rates and yields will move out again; but we think those fears may be overdone.
Capital values will remain firm - not from ongoing yield compression as we have seen over the last few years but from rental growth and the weight of money chasing a limited supply of investable assets, as investors continue to pursue yield.
The replacement cost of buildings with high land values, increasing construction costs, and the complexity in council consenting and bank funding processes; will underpin existing building values.
The potential downside risks associated with the coalition government's well-intentioned social agenda are unlikely to have an effect during 2018.
Industrial will be a strong performer with expectation of rental growth to continue while yields hold firm. More inventory will come to the market and will meet a good amount of demand.
CBD office is expected to remain steady with low vacancy and high demand while sale volumes will reduce relative to last year. Yields are expected to remain firm. Suburban office may start to encounter some weakening of rental demand.
Retailers will feel further influence of online sales in the wake of the recent effects from Amazon Australia on their retail market. This technological disruption continues its influence on traditional physical retailing.
The low ratio of retail space per capita will help to fend off the negative pressure on rentals in 2018. Affordability will remain a factor throughout the year.
Offshore purchasers remain cautious of the proposed restrictions on foreign investment and immigration. They will continue to enter the New Zealand market but will be more selective and do their homework!
New non-bank lenders, poised to enter our markets, will introduce access to funds that are much needed in the development sector.
Looking at where the value-add opportunities sit, we see that commercial property investors will continue to be heavily biased towards "prime" and "secure".
This means that the biggest opportunity for opportunistic investors will be changing short-income to long-income. But our biggest tip on the market for 2018 is to stay fully invested.
The current global real estate cycle has further to run, as the global economy is yet to build up excesses that typically lead to a downturn.
Sovereign investors, HNW privates [high net worth private individuals], core and add-value funds will continue to dominate demand and activity, but there will be a shift from trading to holding strategies by local owners, as capital becomes harder to redeploy.
Larger offshore investors that can find opportunities, will do so, mostly through local partnering. We expect to see a rise in structured, off-market deals, as parties look for innovative ways to assemble ownerships and unlock opportunities in larger - mostly privately held - portfolios.
Structural shifts can expect to drive occupiers with momentum in co-working in the office sector, e-commerce in industrial and logistics, continued growth of operating sectors such as student accommodation and the emergence of multi-housing.
As traditional industrial locations become tighter for occupiers, Drury and Papakura will offer relief, particularly for owner occupiers and new entrants.
The opening of new residential developments in these locations will deliver strong employment pools and will create new economic hubs to support South Auckland regional growth.
Yields across all sectors can expect to stabilise for core investment assets, as the market nears the end of its current cycle, influenced by both interest rate rises and inflationary pressures, that are likely to build in 2018.
One of the biggest impacts on the market will be the lack of traditional development funding, with the HNW community expecting to increase its influence, with private placement, underwrites and a mix of equity and debt structures. As the funding environment changes - with tighter capital banking requirements and the rising cost of funds - debt capital markets, diversification and the emergence of new banks entering the market will have a bigger impact than envisaged.
Auckland is coming of age, driven by the intensive and overdue infrastructure investment.
'It’s a shambles. It’s been going on for about eight years' Brian Peat says.