Market in good shape despite interest hikes, seismic risk

John Church.

All sectors of the commercial property market are in good shape with three successive hikes in the Official Cash Rate by the Reserve Bank yet to produce any obvious dampening of investor demand or any noticeable impact on yields, says John Church, Bayleys' national director commercial.

Writing in Bayleys' third national Total Property portfolio publication of the year, Church says that capitalisation rates, if anything, have continued to compress and yields on industrial and office properties have closed the gap on retail as an improvement in both the quantity and quality of offerings in these sectors has met with investor approval.

"Whereas industrial properties in sought-after locations such as East Tamaki, for example, were mostly selling at yields of 8 to 9 per cent this time last year, they are now more likely to be yielding 7 to 8 per cent and sometimes less."

Church says yields on quality retail properties have remained consistently firm over the past few years, with most offerings at the popular lower to medium value end of the market selling at capitalisation rates of between 5 and 7 per cent.

"Despite all the conjecture about the impact of internet shopping on retailing, there is still very strong tenant and investor take up of well-located shop premises and this is likely to be the case well into the foreseeable future."

Church says rental increases, which are the main contributor to capital growth, are occurring but are still at relatively low levels with many leases having Consumer Price Index-related rent reviews. The latest New Zealand property performance indices released by Investment Property Databank (IPD) shows that total returns (income yield plus capital growth) are running only slightly ahead of their long-term average of 10 per cent a year.

"It takes time for rentals set on new leases to work their way through the market but it is inevitable that significant increases lie ahead," Church says.

"With prices for land now heading back to - and in some cases exceeding - pre-global financial crisis levels, increased rentals are needed to make development projects viable. Companies are also once again under competitive pressure to provide market-leading premises to attract and retain staff and this will contribute to the upward push on rentals as well."

At the last market peak in 2007, the IPD measured overall total returns at 24 per cent a year driven by double-digit capital growth on the back of sharply rising rentals.

"While we may not return to that sort of level again, history suggests that there is still plenty of rental growth upside left in the market for investors," says Church.

Seismic risk is also no longer the big issue it was a year or so ago when it was the dominant topic of conversation at property forums, says Church. There is still a market for earthquake-prone buildings, as evidenced by Bayleys' recent sales of two century-old buildings in Karangahape Rd with seismic assessments of less than 33 per cent of New Building Standards.

"Buyers and sellers now generally have a good understanding of the various measures used to determine seismic risk. They are dealing with these as a normal part of a whole range of considerations that determine whether a property sells and the price that is paid for it."

Church says syndications are now a well-established and enduring part of the market with a recent offering of a Bunnings Warehouse in Silverdale, marketed on behalf of Augusta Funds Management, generating the most inquiry Bayleys has ever had on a syndication scheme. More syndication offerings are expected to be a feature of the latter half of 2014.