Belief in industrial sector soars

Investor confidence in the Auckland industrial sector is at a net positive 63 per cent - up from 36 per cent a year ago, says a survey by Colliers International.

"This is the highest on record and leads all other sectors," says Chris Dibble, Auckland research manager at Colliers.

"The industrial sector provides investors with lower seismic strengthening cost risks, and typically high transparency in property and facilities management together with business operations," Dibble says.

Owner-occupiers are also aware of the shift in positive sentiment. They have been securing premises to insulate their businesses from expected rental rises. Investors, assisted by a low interest rate, are securing premises with mortgage payments sometimes lower than rental payments.

Dibble says the popularity of industrial property has put pressure on average prime investment yields. "They have firmed by around 300 basis points in Auckland over the last decade, now at a record low 7.5 per cent. We therefore expect a higher proportion of capital value growth from rental rises rather than yield compression in the year ahead."

Growth of the industrial sector, with design builds totalling about 170,000sq m since 2011, indicates businesses are expanding and that the sector is outgrowing current specifications.

While absorption rates slowed considerably during the global financial crisis (GFC), increased activity is now stimulating the need for suitable land availability, especially in areas where there is an opportunity for private developers.

"Auckland's industrial sector expansion is set to continue with 100,000sq m of space in the construction pipeline, most of it in the south of Auckland," Dibble says.

"DHL's announcement of yet another distribution warehouse exemplifies the expansion and there are also occupiers moving to newer premises to take advantage of the efficiency in design provided by modern premises.

"The notified draft Auckland Unitary Plan is also contributing to modernisation with industrial premises over 5000sq m to meet a minimum four-star rating from the NZ Green Building Council," Dibble says

"Tenants are noticeably more enthusiastic in the growth environment, enabling them to commit more comfortably to a long-term future."

There are nearly 30,000 industrial sector related businesses in the Auckland region, according to Statistics New Zealand. Just over 10 per cent are located in South Auckland's golden triangle encompassing Wiri, Onehunga, East Tamaki and almost 40 other areas in between.

Industrial related jobs account for almost a third of all employment in the region. This suggests growth capacity in the south, assisted by the geographic proximity to major markets and infrastructural networks, but also ownership and capacity for development by major landholders.

Dibble credits a more predictable economic climate in the past 12 months for the record confidence in the industrial sector.

"Elevated confidence levels have also set the scene for a more buoyant year ahead. However, tempering the potential for a robust rise in activity is the need for a more broad-based expansion in the sector."

He says much of the industrial sector's rise is focused on prime property in terms of covenant, building quality, seismic strength and location.

"Lead indicators show those reaping the rewards from the outset will be the industrial businesses involved in primary production and its offshoots. The more positive business climate will flow on to the industrial sector across its many forms with investors paying for the stability in returns that the sector provides."

Tenants may lose the ability to defer rental rises in the year ahead, with Colliers' latest vacancy survey results pointing to a dearth of available industrial space in Auckland. The survey shows that overall vacancy rate has reached 3.4 per cent, well below the 20-year average of 5 per cent.

"Finding efficiency in premises remains a key driver for all tenants, but the decline in prime and secondary vacancy to below 4 per cent suggests that industry is expanding," says Dibble.

"Rents will rise in the areas with the most demand. However, over supply - especially in smaller, lower quality units - will restrict rental growth prospects."

Dibble says the abundance of secondary space is holding the sector back. "As time goes on and efficiencies from modern premises continue to be realised, there will be limited recourse other than brownfield development of older stock reaching its economic life," he predicts.