Industrial land in short supply

Fierce competition for industrial property from investors, businesses and developers is continuing to drive increases in Auckland's rentals and capital values.

In its latest overview of the Auckland industrial market, Bayleys Research says "strong purchaser inquiry and consequent upward pressure on values" has been shared by all districts within the Auckland region.

However, Auckland's municipal and local authorities are facing challenges in relation to encouraging industry and jobs within their areas.

The report says that a shortage of vacant industrial land is a recurring theme throughout the region.

David Gubb, an industrial manager with Bayleys Auckland Central, says substantial increases in land and construction costs also mean that developers are looking at other uses for former industrial sites such as bulk retail or office buildings, which provide higher rentals.

Resource management and code of compliance issues are pushing time frames out and eating into margins, says Gubb.

"A combination of these factors has led to a number of traditional industrial developers reassessing their involvement in the industrial sector of the market and is resulting in a shortage of traditional basic warehousing premises."

Gubb says businesses are having trouble finding warehouse premises and those that are available are being quickly snapped up. A new 3664sq m high stud warehouse building in Industry Rd, Penrose, was sold to an owner-occupier for $3.9 million by Gubb and Mike Houlker within 24 hours of going on the market.

The shortage of vacant industrial land has resulted in local government being put under pressure to rezone land. David Poole, director of Bayleys Manukau, says speculators have purchased land zoned for rural use but adjacent to business use land in the expectation of a zoning change.

Poole says the airport district has seen much of this activity, with rapid increases in values for land zoned for rural use in the Oruarangi Rd area.

The increase in land prices has seen the emergence in Manukau of leasehold land offerings, traditionally the preserve of CBD or waterfront locations. However, market conditions have made industrial leasehold land an attractive option by reducing the initial land component cost of developments. The recent purchase and development of leasehold land in Westney Rd at Mangere Airport by Macquarie Goodman demonstrates the trend.

It purchased a 20-year perpetually renewable lease on the land from Workstore Developments Ltd through Bayleys Manukau office, on which a distribution warehouse has been developed for Linfox Logistics.

Councils are having to consider extending metropolitan urban limits to increase the availability of industrial land, says Bayleys Research analyst Ian Little.

Faced with the problems of a lack of available business land and 60 per cent of its workforce leaving the city for work, the Waitakere City Council has applied to move the limits in three areas: Hobsonville Airbase, Hobsonville Village and Westgate-Massey North. All three spots are close to motorway intersections, an important consideration for business.

Little says the shortage of industrial development land and encroachment from alternative uses is particularly acute in North Shore City. This has had a significant impact on industrial land values, driving them from about $180sq m in 2001 to over $400sq m this year.

Future greenfield development will require industrial precincts to be formed, he says. The Rodney district is the most likely source of new development land. The council has identified the need to increase the commercial element of its rating base as this now stands about 8 per cent compared with 28 per cent in North Shore City and 30 per cent in Auckland City.

Little says rezoning and adjustments to the urban limit will be required if the limited existing industrial stock in areas such as Silverdale is to be supplemented.

Bayleys Research says the strong competition for the limited supply of investment property coming onto the market has also pushed yields on industrial property down this year.

The Bayleys Research Auckland Industrial Yield Index firmed to a record low of 8.25 per cent in the June quarter, and preliminary figures for the September quarter suggest a similar level.

Gerald Rundle, manager of Bayleys Research, says this is the lowest median yield recorded since Bayleys Research began compiling the index in 1994.

The index tracks the median yield on Auckland industrial property. The yield represents a property's net annual rental income return as a percentage of its sale price: the higher the price achieved, the lower the yield.

Rundle says it was widely anticipated that yields would start to ease this year after reaching what was then a record median low of 8.54 per cent in December.

However, this has not happened with much of the pressure on yields resulting from properties being tightly held. Investors have also been prepared to accept lower yields to secure property, in anticipation of future rental growth.

Rundle says yields are expected to ease eventually as the economy cools and interest rates edge up.

On the other side of the ledger, however, the imbalance between purchaser demand and properties for sale is likely to ensure that any softening of yields will be gradual unless there is a significant increase in the number of properties being brought to the market.