This year will be one of opportunities and some challenges for commercial and industrial property investors, says Bayleys’ National Director Commercial and Industrial John Church
Many of the factors that made last year one of the busiest ever for the commercial and industrial property market remain intact:
- an already strongly performing economy is forecast to get even stronger this year, which should continue to result in high levels of business, investor and consumer confidence which helps fuel leasing and sales activity
- interest rates, although likely to edge up a little this year, will still be at very low levels
- while yields have followed interest rates down, the return on equity from commercial property investment remains attractive compared to returns from bank deposits and bonds
- property provides a more stable investment choice than more volatile equity markets
- low vacancy rates across most market segments have removed much of the tenancy risk associated with purchasing commercial property
- these high occupancy rates are also providing rental income growth for investors, which will continue this year as the development sector is still some way off fully catching up with demand for new premises.
In particular, food and beverage, tourism and hospitality businesses and properties are set for another cracker of a year on the back of record visitor numbers and major events such as the Lions tour and the World Masters Games.
Our maturing syndication market should also have another strong year with further large offerings and an increasingly active secondary sales market providing smaller investors with plenty of choice.
There is a wave of capital still coming out of China and New Zealand remains a very attractive destination for that, so Asia will continue to be an important part of our marketing focus this year.
New Zealand is also definitely on the radar for global brands looking to expand internationally. This will mean more new entrants into the leasing market, with Tesla already flagging its interest in establishing a presence in New Zealand and further high profile fashion brands likely to set up shop here.
A combination of these factors should result in another very active year for the commercial and industrial property market with plenty of opportunities for both buyers and sellers. However, a number of global influences, along with domestic credit constraints, are likely to pose some challenges.
Rising bond yields and interest rates will reduce the sector’s attractiveness for investors and therefore dampen recent very strong commercial property returns. The biggest challenge facing investors this year is likely to revolve around the availability and cost of funding. Most commercial property transactions entail a degree of leveraging and much of this finance comes from the Australian owned trading banks.
For various reasons these banks have tightened up the supply of funding to the commercial property sector. One of the most notable effects of this has been the reduction of funding available to new entrants into the market, particularly developers.
The biggest impact has been in Auckland, where it has unfortunately come at a time when Auckland needs a step up in development activity to make the most of the opportunities for growth opened up by the new unitary plan.
Instead, land that would otherwise have been developed is being retraded back into the market where the pool of potential buyers is now largely limited to traditional long standing local developers or wealthy offshore parties.
This is a shame because it has robbed the market of what would have been a reasonably good number of new developers including those who had waited to take advantage of the opportunities provided by the unitary plan.
None of the non-Australian banks at this stage appear interested in grasping the opportunity to become bigger players in the commercial property sector and there is only a very limited amount of second tier funding available. An increase in borrowing rates this year has also been widely flagged.
A reduction in the supply of funding, coupled with an increase in its cost, is likely to mean less buyers in the market and pressure on yields and prices. This is already evident in the development land sales market where the rising cost of construction is a factor as well.
This is an election year and there is also a degree of uncertainty surrounding how our new Prime Minister will perform and the possibility of NZ First holding the balance of power.
Election years traditionally means less buyer activity in the latter part of the year. Therefore for those looking to sell this year to capitalise on the strong increase in values that has occurred over the past few years, the best option would be to do so in the first half of the year.