Nothing on horizon to block momentum

The sale of this New Plymouth property reflects high interest in provincial properties.

There are no signs of any easing in the commercial and industrial property market's considerable momentum, says John Church, Bayleys' national director commercial.

In his introduction to Bayleys' latest Total Property portfolio Church says the high levels of commercial property activity evident all year have been rolling on through into the winter months.

"A good indication of how the market is performing can be found in Bayleys' turnover figures for the April-June quarter," he says. "Total national sales and leasing commission revenue for the commercial sector of our business was up 25 per cent on the same quarter last year. That's a remarkable increase given that 2015 was the market's hottest year since the GFC [global financial crisis].

"What's most pleasing is that this continuing growth is relatively evenly spread around the country which confirms that regional economies are performing very well indeed, despite the dairy downturn."

Two of Bayleys' biggest recent sales have involved provincial properties: the former central post office building in New Plymouth, now anchored by a Quest Apartment Hotel, and a giant Hastings bulk retail store tenanted by The Warehouse which both sold in the double figure millions.

The Warehouse transaction was the largest commercial property investment sale in the Hawke's Bay since the Kmart Centre sold for $18.5m in 2011, at a 10.5 per cent yield. The property attracted multiple offers and sold at a 6.53 per cent yield with the price in excess of $4m more than it sold for in 2011 at an 8.25 per cent yield.

John Church of Bayleys

"This indicates just how much the market has moved over the past five years," says Church. "It also shows that regional markets are now exhibiting, albeit to varying degrees, the firming yield trend that has been evident in Auckland for some considerable time.

"Another feature of these transactions was the strong interest in these two properties from Auckland investors. This has become an increasingly familiar pattern this year and prompted the holding of a regional commercial property expo in our central Auckland office in June showcasing regional listings from our third Total Property portfolio. As a result of the success of this national initiative, we are gauging vendor interest in holding a second, similar regional expo in early November."

Church says there is nothing on the immediate horizon that looks likely to slow the market. "A significant increase in interest rates can be a major tipping point for the commercial property market because of the effect it has on yields and return on equity. However, that seems a long way off, with the Reserve Bank expected to make at least one more cut to the Official Cash Rate following last week's cut which is putting even more downward pressure on already heavily squeezed cap rates.

"Some economists are predicting that the current low inflation/low interest rate environment may remain in place for the next five years."

Another key influencer on property values, the supply/demand balance, remains heavily weighted on the demand side, Church says. A lack of appealing alternatives for investment property owners is constraining supply while both investors and business owner occupiers are contributing to the strong demand.