Pearl in the property market

"Land value is going to appreciate when it is close to centralised areas and transport systems," says Mark Schiele, the CEO of Oyster Property Group. He says these fundamentals drive commercial property investment and location remains the most important factor. Above all else, he is looking for "enduring customer demand" when considering investments.

For Oyster that means Auckland. About 80 per cent of the commercial property and funds manager's $1.7 billion portfolio is in New Zealand's largest city.

"Auckland is the most desirable location," Schiele says. "That's important for any property investment.

The city is an isthmus, we can't go east or west to create more property. It's the largest city in New Zealand, it's the centre of business activity and it's been growing by about the size of Nelson every year for the last five to 10 years.

"These are all the fundamental factors which mean the land value is going to appreciate."

Within Auckland, the areas that are most desirable for commercial property investment are a moving target.

Schiele says the inner-city rail link, now under construction, will result in more changes. There are areas within the existing CBD that are now more popular for business because of the location of a railway station that wasn't there 10 years ago.

"That's good for the city. It changes with transport networks. It changes when a new motorway on ramp is built. It changes when a new entertainment venue opens. There are also changes with agglomeration. To a certain extent this is what happened with the Wynyard Quarter," he says.

Wynyard Quarter's significance started when Air New Zealand moved there. Schiele says; "It has since picked up critical mass. People beget people."

The land pricing made a huge difference to Wynyard along with zoning and the leasehold structure in the area.

Another example of where transport links are vital is the Southern Corridor. Schiele says Oyster has invested in office parks along the corridor including the Millennium Centre and Central Park on Great South Rd. "We did that because believe in that area," he explains.

"It allows us to provide a large amount of office space at an economic rent that is very close to transport systems, whether than means motorway onramps, train stations and buses."

Schiele also sees potential in Albany on Auckland's North Shore. Oyster has three buildings there on Corinthian Drive including C:Drive, ASB Bank's technology and innovation hub.

While Auckland is Oyster's main regional focus, Schiele says his company also likes the Golden Triangle which takes in Hamilton and Tauranga. He says Hamilton and Tauranga are becoming more integrated with Auckland. They have easy access to Auckland and share the same underlying business community and reason for being that squares with Oyster's strategy.

He also sees value in Wellington. "The topography favours us. There's not a lot of flat land to build on so that leads to natural land value appreciation.

"It is the centre of government. The government is a strong occupier there and under the current Government there's a lot of excitement. It's not naturally growing like Auckland in terms of population, but it's got a high per capita income and there is likely to be more demand."

Wellington's downside is the earthquake risk. Schiele says this brings a number of issues for the commercial property sector. "The largest is insurance and premiums. High premiums are a problem because Wellington is less of a growth market, so for commercial property investments insurance comes off the bottom line. But the biggest problem is securing insurance, insurers don't have the capacity for Wellington."

Traditionally when fund managers include commercial property in a balanced investment portfolio they head for listed companies. Schiele says this give them liquidity on a daily basis, but that comes with a downside. "With that they also get sentiment related movements in share trading. The value of the investment doesn't necessarily follow the underlying asset value."

Oyster's Direct Property Fund is unlisted. Schiele says from an investor's point of view an advantage is that it isn't subject to the sentiment-driven daily drift that you would find with listed investments.

When the overall market sentiment changes, all asset classes are affected. There can be a flight to the perceived stability of commercial property, but there are times when listed property stocks trade below the potential value of their assets.

Property tends to move in a different cycle to the broader economy in part because tenants sign multi-year leases. Schiele says property's investment value is based on people's willingness to rent buildings and this tends to lag the wider economy.

He says people often invest in commercial property because they see bricks and mortar as a defensive stock.

"People see that there is an intrinsic value there even if the tenant has still to be found. The land is worth something, the building has value. Lease cycles are long, but underlying all this, the property has to be in a desirable location."

Another advantage is that investors typically get monthly distributions rather than six-monthly dividends. "Our funds return to our investors on a monthly basis. Many investors find that desirable," he adds.

Commercial property faces its own set of disruptive forces. Schiele says 20 years ago buying properties for a chain of Blockbuster video stores would have made sense. "Netflix changed that."

One of today's disruptive forces is the tendency of large companies to switch to new practices such as Agile working, where people no longer have fixed desks. Schiele says a company that might need 2000 square metres today might only need 1000sq m when many employees work from homes or cafes.

The move to driverless cars is on Schiele's radar — that's going to change the need for large underground carparks in the city. That in turn will change construction economics as digging out parking spaces adds to building costs. The need for Auckland car parks is already changing with the imminent arrival of the City Rail Link.

Disruption doesn't have to all be negative.

One trend that Oyster is watching is the move to co-working spaces. He says the move towards buildings that lease out desks for short periods of time is accelerating and there is greater need everywhere for collaborative spaces. Staying on top of these trends matters, but for Schiele, the most important thing is to look for opportunities where there's a long-term demand from tenants.

Oyster Group
• Oyster Property Group is a commercial property and funds manager.
• It manages a retail, office and industrial property throughout New Zealand.
• Oyster's portfolio is worth more than NZ$1.7b.
• The company manages more than 20 property funds including the diversified Oyster Direct Property Fund.