Commercial Property Outlook
In March 2016 CBRE held a property market briefing at Trust Management’s offices. The presentation included CBRE’s latest economic and property research, comparing New Zealand to other countries and more specifically Auckland to other international cities.
In recent years commercial property has performed well in Auckland. The positive aspect of the presentation from CBRE is that this performance is based on sound property investment fundamentals. In additional the outlook for commercial property continues to look favourable.
In Auckland, with the overlay of strong net population growth and moderate GDP growth, the economic conditions under-pin the commercial property market. Tenant sentiment is positive but cautious. At property level there is a low level of vacancy across most commercial property sectors with no development over-supply of space forecast. Combining these elements the fundamentals for the performance to date can be justified. Tenant demand continues to focus on quality of space while looking to deliver more efficient and effective property solutions for their business operation. In the commercial office sector another issue driving tenants to quality premises is to attract and retain staff.
The graph below reflects office research undertaken by CBRE identifying the reasons for tenants looking to change premises. Patrick O’Reilly, Trust Management’s General Manager Property, noted that this “flight to quality” is a theme that he is seeing in the current market place. Patrick highlights that tenants are well informed and focused on what property solution they are seeking to achieve. Patrick highlights that quality of asset and location are key elements that attract tenant demand.
NZ Occupier Sentiment
The lower bank bill rate is another element that has supported hardening property yields. As reflected in the next graph, the average property yield (combined for industrial, commercial office and retail property) is positively correlated to the bank bill rates. CBRE noted that the current gap is wider than average and suggests further potential yield compression could occur. The property portfolios under Trust Management stewardship have seen strong capital growth and the positive momentum appears to have continued into 2016.
Bank Bill Rates vs Property Yields
Notwithstanding the yield compression that has been experienced, Auckland continues to be well positioned with rental growth. The graph below compares industrial rental growth experienced across major international cities. Auckland has performed strongly in comparison to other international cities, especially when considering China’s GDP growth for 2015 was circa 6.5% compared to New Zealand GDP of 2.5%. From Trust Management’s perspective it is good to see capital growth that is attributed to increased rental levels for its investment clients. The clients obtain a higher level of distribution while the capital value also potentially increases.
Industrial Market Rental Growth
Over $4b of investment real estate transactions were completed in New Zealand in 2015. Interestingly local investors still contributed to circa 65% of this activity. Notwithstanding this, and as reflected in the next graph, offshore buyers dominate transactions when the transaction size increases to over $50m. Transactional activity from off shore investors has increased in recent years with the like of GIC (Singaporean) and PSP (Canadian) funds investing over $2b in New Zealand property vehicles in 2014 alone.
2015 NZ Transaction Activity - Local vs Offshore
In summary, there is strong fundamental basis for the positive commercial property performance that we have experienced in New Zealand in recent years. Based on the CBRE property briefing, looking forward, the Auckland commercial property market remains well positioned for this performance to continue.