Clouds on the horizon for New Zealand commercial property, expert says

“The sector is enjoying an extended cycle with record-low interest rates and a sustained rally of positive market fundamentals. But no cycle lasts forever, and there are some clouds on the horizon – with rising economic uncertainty, regulatory challenges and a tightening of bank finance.

“Investors should be re-evaluating portfolios and strategies to make sure they’re fit for “extra-time” in this cycle.” With returns from many assets contracting, as property prices rose, there could be a tendency to chase returns and take on more risk.

More properties may come to market

Colliers International said interest rate margins were likely to rise as well as term deposits which might persuade owners to put more commercial properties up for sale to cash up the strong capital gains of recent years.

Whether it was a good time to sell depended on the personal circumstances of owners, Colliers director of research and communications Chris Dibble said

There was strong appetite from investors for top quality office stock providing an opportunity for owners to sell but their concern would be what else to invest their money in. Office sales were likely to be “solid” in 2020 with the big challenge being rising operating costs and suitable office building stock for investors to buy.

Some hotel owners were expected to put their hotels on the market to take advantage of buoyant trading and a strong appetite from investors for hotel properties.

Industrial property will continue to shine

Industrial property vacancies were very low across the country and that had been driving prices and rentals up, Dibble said.

Investors would now be more attracted to secondary industrial property for the lower prices and better returns and opportunity to add value given the rising prices and lower yields from prime industrial property.

Industrial property company PFI has said secondary industrial assets are forecast to be the top performing asset class of 12 assets over the next five years. The forecast was for 11.2 per cent a year from capital gain and income.

Big year for syndications of properties

Bayley said in the era of low interest rates new and small investors would be drawn increasingly to property funds and syndications as of way of finding better returns than from bank deposits. Bayleys has been marketing syndicated properties for 16 years.

It is the distribution partner of property fund manager Augusta Capital which is intending to seek investors in February for a new diversified property fund and a tourism fund investing in hotels and tourism sector real estate.

Syndicated property investments were set to become a mainstream investment option, Bayley said.

“It’s going to be a very strong year for syndications,” Dibble said, “There is a lot of equity in the market looking for the right return.”

Colliers syndication team was very busy already early in 2020 offering investors a share in the Tauranga Crossing shopping centre in the Bay of Plenty where Oyster Group is looking for investors to buy about 60 per cent of the property. Oyster would also be syndicating Pastoral House, a large government-tenanted building in the Wellington CBD.

Commercial property market stable

Commercial property sales had been strong in the last four to five years and that was largely because of low interest rates, good employment levels, a healthy business environment and demand outstripping supply and pushing up prices and rentals, Dibble said.

Colliers saw 2020 as very similar.

Commercial property markets did not change quickly because an increase in supply was not fast in the sector as the construction of buildings took time unlike supply in the residential market where dwellings could be built relatively quickly compared to commercial buildings. That helped insulate the commercial property market from significant rapid change.

Tight bank lending would continue to impact the volume of property sales but mostly in the farming sector, Colliers said. Developers would keep focusing on high density and more affordable homes for first home buyers and for investors taking advantage of low interest rates.

Government spending on infrastructure would support the economy, high employment and the property sector.

Election year uncertainty

Elections typically brought periods of uncertainty and disruption to property markets but the depth of that depended on what types of major policies were announced, Dibble said. Investors focused on long term performance fared best.

Build to rent

Dibble said several parties were investigating ‘build to rent’ developments where developers build apartment and terraced house developments for long-term rental rather than sale. Colliers records showed about 500 already in developments of 40 units and more and about another 950 in the pipeline, some under construction, some consented and others in feasibility study. This does not include developments under 40 units and many for social housing.

There were likely to be more of these build to rent projects in Auckland in 2020 due to their being a good solution for changing demographics, rents were rising and capital growth on residential property was returning in Auckland.

Key future trends

Key trends that would “reshape” commercial property in 2020 and beyond were buildings going green, infrastructure spending and the transformation of industrial properties, Bayley said.

The passing of the Zero Carbon Act meant that developers and landlords would face growing demands to cut their carbon footprints whether by tenants including eco-conscious millennials and customers or by Government agencies and departments who would have to meet the legal requirements.

Burgeoning e-commerce and technology changes coupled with a lack of industrial development land would start “to change the face of industrial property”.

Online sales would drive the demand for warehousing and logistics property in the future. Packing by robots would become more common, and warehouses would extend upwards from a typical stud height of nine metres to up to 30 metres, more typical of a 10-storey office, Bayley said.