The upcoming Budget is likely to be the most significant for the commercial property industry for many years, says Alan McMahon, director of research and consulting for Colliers International.
In the latest issue of Colliers' Research Report McMahon says there could be some positives in the Budget, such as reduced personal tax, but the market's attention will be focused largely on the possible removal of building depreciation allowances.
"The tax working group note that if empirical evidence shows that buildings do not depreciate in value, then removal of allowances should be considered," he said.
"However, our data suggests that buildings, or at least commercial buildings, do depreciate - so property owners will be hoping the Budget reflects this view.
"According to our databases, there have been many times in the last 15 years that land and buildings values have fallen, in every sector, giving further weight to the suggestion that buildings do indeed depreciate."
McMahon says around 1.37 million people now have Kiwisaver accounts, so this would be an important issue even if only listed property companies and their shareholders were affected. "But the majority of commercial property is not owned by listed entities or private investors, but by private businesses.
"Separating land value movement from improvements or building and value movements, given the endless variety of heights and floor area ratios, is a virtually impossible task on a market-wide basis. Different densities can result in, say, half a square metre of industrial building for every one square metre of land, to 10 square metres of office building for every one square metre of land.
"Thus changes in land value have a relatively larger effect on industrial property than office property.
"However, as anyone who has carried out a residual valuation, or a development feasibility study will tell you, land value is a product of the value and cost of what is built on the land, so the two elements should move in tandem.
"Land and buildings value trends are therefore a reasonable proxy for 'building only' value trends," McMahon says.
Commenting on sales activity in the research report, Peter Herdson, New Zealand sales director for Colliers International, says it is clear from market activity over the last 12 months that quality commercial investment properties with solid fundamentals - such as a sound tenant, a lease term of at least six years, and a good location - have held their value well since the onset of the global financial crisis.
"This has been confirmed with numerous property sales in the $1 million to $5 million price range," Herdson says.
"Discussions around possible changes to the taxation of commercial property have caused a few private investors to hold on to their cheque books, but many are actively seeking stock to add to their portfolios in the belief that we are near or at the bottom of the cycle.
"There are, of course, fewer buyers for non income producing property, of which undeveloped land is a common example. However, unlike 2008 and the first part of 2009, some of the surviving developers are active.
"Everyone, from banks to valuers to the developers themselves, are making conservative assumptions in terms of time to sell, pricing, and debt costs in particular, but where a development stacks up after all of that scrutiny, sites will sell."
Herdson says Colliers continues to see considerable activity in a number of sectors.
"Our property auctions have been extremely well attended, with buyers competing fiercely for investment properties of up to $5 million in value. We expect this to continue this year, particularly while bank deposit rates remain below property yields.
"We are also noticing a pick-up in industrial inquiry and believe we will see a very active year in this sector. Also, as predicted sale and leasebacks continue to be popular."
The Research Report says a predicted reduction in prime property vacancy in Auckland CBD by the end of this year "looks encouraging" but it should not be assumed that the downward trend will continue.
"Prime vacancy is unusually high, and a reduction of half a per cent is only say two floors in any of the premium or A-grade buildings. During 2011 we expect the rate to increase again, to around 15 per cent.
"After that, prediction becomes difficult as it depends to an extent on the degree of expansion, if any, in the economy and thereafter in demand for office space in the next three or four years."
The report says industrial land take-up around the country has been "muted" in the last year which has "silenced, at least for the moment, critics of local authorities' reluctance to rezone more land for industrial use".
Low land take-up typically leads to a low level of building consents being issued and consents have already been falling quite substantially.
"The low pace of development means they are likely to keep falling for a while yet," the report states.