With interest rates low and likely to go lower, many savers, depositors and investors are now in search for a higher yield on their funds, says James Kellow, Director of New Zealand Mortgages & Securities (NZMS)
Kiwi investors love property with the medium to long-term lease income profile and net return of commercial leases attractive to them. As well as growth, they get ‘bricks and mortar’ security.
Baby Boomers need to start investing their money into yielding assets. That’s where they’ll get a return and that’s where New Zealand needs them to be.
Their investment can be via direct property investment or purchasing a share in a property syndicate of listed property trust. Either way with bank deposits rates low, there is currently strong demand by investors.
However, for a vendor to be convinced to sell, the property needs to be at a low yield. It’s about finding that sweet spot, where the yield is low enough to encourage the owner to sell, but high enough to secure a buyer.
Regardless commercial property buildings will increase in value because yield expectations are falling. Whereas previously an investor may have wanted a 5% return, they now may accept 4%. This is a 20% increase in property asset value assuming rental stays the same.
In this environment, property owners will tend to hold onto their commercial assets but because the returns are still higher than bank deposit rates others will now be keen to invest. So, the outlook for commercial property owners is good – more demand for their buildings means higher sale prices.
Business confidence is subdued so there is probably limited scope for any real rental growth in the short to medium term. However, this will be offset by yield compression on capital values. So, for well-located properties the outlook is good. For vacant properties in fringe locations the outlook has always been relatively poor and will continue to be so.
Investors who get into commercial assets need to ensure properties are up to modern fire and seismic standards. What’s more, they need to factor in that tenants may require flexibility as their businesses expand or contract. Those investing outside of prime locations, need to also be aware that there will probably be limited rental growth pressure.
Adding to the surplus demand and price increases, is the fact that there are very few quality commercial properties for sale.
The office category is very strong in the main centres with seemingly a shortage in Auckland perhaps intensified by recent apartment conversions, reducing office stock. Wellington has also experienced this. Any shortage is then exacerbated as the repurposed buildings are simply not being adequately replaced.
Good commercial buildings in downtown Auckland remain strong. This may surprise many given much of Auckland’s housing market is going sideways. However, in the central city desirable contemporary office stock is limited, overall vacancy rates remain low, and rents are solid.
You’ve got to remember that many of the businesses today looking for new office space see it through a very international lens. They have international property managers making the decisions overseas based on international specifications and hence they demand international-grade buildings.
As well as all the technology and environmental requirements, they want large floor plates for connectivity and hotdesking, mixed-use spaces, you name it. But the challenge remains that much of the city’s existing office stock just can’t provide anything like that.
Industrial is sound with warehousing a growth sector assisted by online shopping and demand for distribution centres. Retail property is relatively weak except speciality retail, food and beverage, and sectors that are protected from online sales.
Overall yielding commercial assets continue to enjoy good growth. There’s no evidence that it will change in the foreseeable future.
In general, good commercial properties in New Zealand are only going to increase in value in the short to medium-term, with their capitalisation rates now tracking down below 5%.
New Zealand Mortgages & Securities is a joint venture between Mansons TCLM and James Kellow, a specialist property financier. Mansons is one of New Zealand’s most successful and long-standing development companies and has built more Green-Star-rated commercial buildings than any other in the country.