Experts give gung ho crystal ball readings

More big foreign capital investments are expected in Auckland’s commercial property market this year. Photo / Supplied

We asked commercial property leaders for their opinions about prospects for the 2019 market:

Mike Bayley

Managing Director Bayley Corporation Ltd

The flow of investment funds into the commercial property market which reached unprecedented levels in 2018 is likely to gather even more momentum in 2019.

This will be led by continuing diversification out of the residential market, particularly in Auckland where the housing market is likely to remain fairly flat for the next few years. At the high value end of the commercial property market, the big influx of foreign capital in 2018 is likely to be just the tip of the iceberg. When the world’s largest real estate private equity investment firm, Blackstone Group, outlays NZ$636 million to acquire a portfolio of office buildings in the Viaduct (being managed by Bayleys Property Services) the rest of the globe takes notice – and generally follows suit. Expect more big investments from the likes of Blackstone, Invesco and S C Capital in 2019.

While we’re a small market, New Zealand offers global investors a safe harbour in an increasingly turbulent world. Enhancing connections and exposure to international markets will therefore be a major focus in 2019. In this regard, Bayleys acquisition last year of Knight Frank’s New Zealand business operations, and our strategic international alliance with them, will provide additional global profile for our clients.

Regulatory restrictions will continue to constrain the amount of funding our main Australian owned banks can allocate to commercial property. However, we expect at least one offshore based non-bank commercial property lending entity to establish itself in New Zealand this year. This will open up more funding options for the development sector in particular.

The investments funds and syndication market should continue to flourish and offer an increasingly diverse range of products such as Augusta’s tourism property fund and potentially a residential focused fund later in 2019.

Mark Synnott

CEO Colliers International NZ

The rise of flexible co-working, new streams of non-bank lending, and the emergence of build-to-rent are among the key trends expected to shape the New Zealand commercial property market in 2019.

The market has well and truly bounced back after a post-election slump in late 2017 and early 2018. On the back of this uptick in activity, we anticipate another exceptional year of growth in 2019. The ongoing low-interest rate environment and sustained offshore investor interest will underpin this growth.

The flexible co-working sector looks set to continue its meteoric rise. The sector has doubled in the past three years, and our forecasts show it will double again within the next five. The main constraints are low levels of vacancy and high levels of rental growth in the office sector, reducing available options.

Non-bank lending is likely to become more prevalent as developers seek alternative funding models. At the same time, margins for builders are likely to grow due to consolidation in the construction sector. Development conditions will make speculative builds more attractive, particularly in the office sector. There is already strong demand for spec-build office space, as evidenced by uptake at No 1 Sylvia Park and 10 Madden St in the Wynyard Quarter.

The build-to-rent sector is poised to gain momentum in 2019. This emerging asset class involves the development of residential properties at scale, to be rented out privately rather than sold to owner-occupiers.

The asset class is maturing in the United State and Europe but remains in its infancy in New Zealand. We expect Auckland’s first build-to-rent residential project to launch in 2019, with further development to follow. Non-bank funders and syndicators will be watching these developments closely.

In the wider residential development sector, KiwiBuild will dominate the lower end of the market. However, skills shortages in the construction industry and the greater margins to be made in the commercial sector, will constrain the amount of supply.

The industrial sector looks likely to continue its stellar run. Significant deals last year included the $93m sale to Goodman of Foodstuffs’ distribution centre in Mt Roskill and the $53.75m sale to Augusta of the Castle Rock Business Park in Christchurch. These were the largest-ever industrial transactions in the North and South Islands respectively.

Scarce land supply, low vacancy, and rising rents will continue to attract investors, with syndicators and listed property companies remaining active at the top of the market.

In the office sector, strong uptake of prime new supply will contribute to growth in the secondary sector. This is good news for landlords, but local investors will find it hard to compete against offshore buyers at the top end of the market.

Invesco’s recent purchase of a 50 per cent share off Precinct of the ANZ Centre in Auckland for $181m highlights the continued levels of offshore interest in New Zealand office assets.

Retail’s transformation will continue in 2019, with some 179,380sq m of new supply expected in Auckland over the next few years, including significant shopping centre expansions at Scentre Group’s Westfield Newmarket and Kiwi Property’s Sylvia Park.

The new retail precinct at Commercial Bay will consolidate the shift of Auckland CBD’s epicentre towards the waterfront and the western CBD fringe.

Hotel supply in Auckland looks set to finally catch up with demand. Revenue in the sector will remain strong due to continued tourism growth and an anticipated spike in demand during the America’s Cup and APEC conference in 2021.

Outside of Auckland, the regions are likely to continue booming. The residential and commercial markets in Hawke’s Bay and Wanaka in particular have undergone tremendous growth over the last two years, which will continue as populations grow. Growth in the other two ‘Golden Triangle’ centres of Hamilton and Tauranga will also remain strong.

John Urlich

Commercial manager, Barfoot & Thompson

There has rarely been a year that has seen us looking more globally for clues than this one.

The economic outlook is now well signalled and a necessary easing of global stock markets is required and due. Clearly, it will pay to be cautious this year, but we believe the property sector will make for continued good investment.

It’s been said that, ‘nobody wins a trade war’, and the effects of US policy will be felt globally, not least of which will be China. This uncertainty will continue to affect the over-bought share market and some necessary correction will ensue. Despite this we are optimistic we will see a relatively ‘soft landing’.

Central banks are growth sensitive and the recent tightening of monetary policy will afford them room to move – and move they will. We are confident any potential slow-down will be managed.

All of this has only one immediate consequence on our commercial property market: investment sentiment. As we saw last year business confidence is the single business determinant in the demand for real estate.

Our advice to any investor, tenant or occupier is that they must consider the current global ructions against the fundamentals of our property market. And our fundamentals are very good.

We would point to record low vacancy rates across all sectors coupled with an unavailability of development options that makes for a challenging environment for real estate agents. Building will remain costly and the uptake of office space has exceeded predictions. Consequently there is a relative shortage of prime office space available in the next few years.

The refurbishment of secondary buildings will continue to remain feasible option and overall the outlook for the Auckland CBD and city fringe will remain consistent. Rental levels will grow. The industrial markets are tighter still and the need for greater space continues and will do so going forward. A high proportion of industrial occupiers we survey have suggested that more space would benefit their business immediately.

Retailing remains a science and a cautious approach to both site selection and rental levels remains paramount for tenants and occupiers. That said, consumer confidence remains consistent and the outlook overall remains positive.

The next quarter may prove testing. Some sectors such as hotels, childcare and residential apartments in the city’s periphery are showing signs of increased supply.

But again, overall, we are positive.

To place a 2019 twist on an old cliche we believe ‘fortunes will favour the bold … but measured’.

Andrew Stringer

Senior Managing Director, CBRE NZ

Two highly influential but diverse market factors will push New Zealand property markets into 2019.

First, global capital remains very focused on New Zealand, and Auckland in particular. We anticipate continuing demand from offshore investors, assisted by recent changes to OIO [Overseas Investment Office] thresholds, but with a shift back down the risk curve.

International capital will continue to dominate major transactions, focusing on highly secure property, moving away from the add-value focus of the past 24 months.

High quality, potentially low-yielding assets backed by strong and long leases are in strong demand across all sectors, with a number of dedicated long-WALT [weighted average lease term] funds scoping New Zealand. This is likely to see renewed opportunity for capital recycling through corporate sale and leasebacks.

Secondly, decision making around how businesses will use their premises will continue to see greater levels of intelligence applied to it, across all sectors of the market.

Office and industrial occupiers are applying ever-increasing knowledge to how they use their premises more effectively in order to drive employee engagement and business performance.

Large corporates and SMEs [small and medium-sized enterprises] alike are acutely attuned to the importance of workplace to business performance. Multi-disciplinary advice has never been more important, as occupiers seek to use property to add value.

For instance, the co-working phenomenon is now entrenched in our market and major office landlords are embracing it, but leveraging this flexibility requires specialist workplace strategy.

In the industrial sector we’re seeing this theme emerge as the massive increase in infrastructure spend continues to drive location decisions, particularly for manufacturing and distribution.

The improving connectivity of Auckland to the Waikato region will broaden choice for industrial occupiers, but how specific locations will suit businesses will depend on supply chain benefits.

Traditional property silos are no more, and sector lines are being blurred, so it will be more important than ever to apply multi-disciplinary intelligence in 2019.

Todd Lauchlan

Managing Director, JLL

In a world where global media headlines have been dominated by economic uncertainty throughout 2018, New Zealand’s economy and property investment market has continued to quietly, confidently and purposefully propel itself forward with little fuss or undue self-promotion.

With an official economic growth rate of 3 per cent for the year ended September 2018, New Zealand has outperformed many of its key trading partners around the world and is set to do so again in 2019 – and beyond according to commentator forecasts. The investment case for New Zealand at a structural level remains strong and robust, and more so if anything.

The benefits of the underlying attractiveness for larger scale investment in New Zealand assets has certainly been demonstrated in recent years. Since 2014, the total market size of $5m plus deals across all commercial property sectors has averaged $4.6bn per annum. By way of comparison, between 2005 and 2013 the average was $1.8bn only. On any scale, this represents a huge structural market shift which cannot be explained by underlying inflation alone.

New Zealand is now increasingly on the global investor stage and should be proud to be so. Our transparent market and no stamp duty or capital gains tax obligations are undoubted advantages.

So, what for 2019? Well, we see more of the same – although opportunities are admittedly a little bit tougher to find these days as investors appreciate the true value of what they own.

With New Zealand’s economy being so well-balanced though, we see scope for strategic investment in office, industrial, residential, alternatives and high end retail/mixed use assets (although we are notably concerned for secondary retail space given such dramatic changes in how we shop as a nation these days).

There is a lot still to play for supported by strong population growth forecast for New Zealand, and Auckland in particular, over the next 25 years. There are of course challenges ahead and not every property will be a winner. Careful planning and strategy will be crucial (as always) to stay ahead of the curve.

At a more localised level, Auckland’s continuing infrastructural advances are opening up new locations through enhancing accessibility.

In Wellington, geographical constraints on development continue to drive value and promote ingenuity across all property sectors.

In Christchurch, the creation of so much modern space following the devastating earthquake in 2011 will revolutionise how business is done there in future. And across the rest of the South Island, with increased physical and technological connectivity, many more areas are opening up as very real opportunities for investors.

There is no reason why 2019 should not be another good year for property in New Zealand.

Paddy Callesen

Managing Director, Savills Auckland

When forecasting the year ahead, those of us who have been in the market for a long time hope for the best but always assess the risks. There is never any shortage of dark clouds and turbulence in far off markets. While these markets do affect us, we trade in a local property environment influenced by continued high net migration and population growth, low interest rates, low vacancy rates and non-inflationary economic growth. This leads to demand in all property sectors. In the absence of an economic meltdown, how will these factors shape the Auckland property market in 2019?

Industrial property will be the standout investment category in 2019. Vacancy will remain at record low levels, along with a scarcity of suitable development land and increasing construction costs. Rents will continue to increase across the prime and secondary grades and we also anticipate some further yield compression.

CBD office property will continue to attract interest from offshore parties, with local buyers priced out of the market. Transaction numbers will be subdued as a result of limited available stock.

Demand will continue to be less strong for retail centres and suburban office property, with the best transactions reflecting either high-yielding or add-value opportunities.

Performance in the housing market will directly affect confidence in the retail property market. Indications of OCR [official cash rate] cuts in 2019 may help residential sentiment to remain steady or possibly improve, despite the recent retraction in Australia.

Development opportunities will continue to be dominated by domestic demand, especially in the smaller scale, sub-10ha space. Pricing will be subject to influence from reduced sales volumes and price moderation of completed products. A material influence will be demand from parties seeking to deliver Kiwibuild opportunities.

We also expect to see continued improvement in the availability of credit in 2019, as several of the larger development projects (office and apartment) reach completion.

John Davies

Co-owner Director, Ray White Commercial Auckland

Challenging conditions for apartment developers in central Auckland are resulting in the mixed use project market softening. Increases in the cost of labour, materials and fees have eroded margins to the point where banks are declining to lend, resulting in developments (especially smaller-scale) being suspended or abandoned. This trend is likely to gather momentum in 2019. Larger, better-established developers with momentum, scale and cash will fare best.

The trend for residential property investors to move into commercial property will continue. Once the darling of property investors, the residential sector has lost its shine and is now highly regulated with a considerable management burden.

Capital growth is no longer a ‘given’ and returns have been eroded to a level that is unacceptable to many. Commercial property offers many attractive characteristics including superior returns, net leases and longer lease terms. These factors will continue to prompt those looking for passive holdings and income to buy commercial property.

Lease lengths are a key consideration for investors and lenders and this will continue, with medium to large-scale investors now demanding leases of at least 10 years. Where just a few years ago six-year leases were acceptable, this has now increased, in part due to banks offering better terms on investments with leases of 10 years minimum.

Overall, Auckland’s commercial property market will remain strong over the medium term at least, supported by population growth and a large amount of domestic and overseas capital chasing limited opportunities. Critical to the ongoing strength of the market are population growth, transport and infrastructure development. The lift in land values relating to the Unitary Plan is most likely now behind us.

Future property hotspots will be linked to key infrastructure and access projects including the city rail link, the proposed ‘pedestrianisation’ of Queen St, roading improvements and retail centre extensions such as 277 Broadway and Sylvia Park.