Buoyant property investors predict next year to be even better

By ANNE GIBSON


If this year was good, the next could well be better.

That is the forecast of property prophets who see pent-up demand sparking yet another great year for commercial, retail and industrial property.

Although a modest interest rate increase and changes in the education industry might put a slight dent in the sector, owners and consultants are not forecasting any significant downturn.

An executive at New Zealand's largest landlord - Kiwi Income Property Trust, which controls about $900 million worth of property - is confident, particularly about prime office blocks.

Kiwi's commercial portfolio manager, Jon Lesquereux, reckons the two years will be almost the same but lower-quality office buildings, particularly in Auckland, might suffer.

"The absence of any significant new office towers will underpin continued high occupancy and further rental growth in the prime sector, while retrenchment in the education market will continue to impact on occupancy rates in some C- and D-grade buildings," he said.

"Buyer demand for high-value prime buildings is only likely to increase with the weight of offshore funds looking for a home, but investor interest in secondary commercial buildings may ease."

Bayleys Real Estate general manager Mike Bayley predicts a slight slowing of activity.

"The favourable economic conditions that have spurred unprecedented interest in commercial and industrial property in 2003 are not expected to change substantially in 2004, although a reduction in economic growth is forecast, as is a modest increase in interest rates," Bayley said.

But he said interest rates would continue to be "relatively benign".

"We would therefore expect market activity to continue to be strong in 2004, although yields have probably been pushed about as low as they will go and are likely to consolidate."

Outgoing Property Council national director Chris Simpson agrees. "It all seems pretty good out there for 2004.

"People I've talked with have already factored in both immigration and interest rate changes so there are no surprises as such.

"But if you were looking in from Sydney you would see that the stars are in alignment for this great city of Auckland.

"It's like we are being discovered for the great lifestyle that we have and there is more potential just waiting to be found."

Australian investors would continue to look and buy, "so expect more acquisitions and mergers".

CB Richard Ellis senior managing director Scott Gray-Spencer believes the year will start on a bit of a downer.

"The first quarter of 2004 should see quite a bit of stock hit the market in both retail and commercial as investors might take a short-term view on interest rates and believe that a rise is imminent," he said.

But underlying strength and demand would soon right matters.

"Investor confidence will remain strong. The commercial leasing market will come under pressure through the educational backlash but we believe the second half of 2004 should see some respite and strength in the commercial market and some small rental growth for smaller tenancies."

Colliers International chief Mark Synnott is particularly enthusiastic about industrial real estate.

"Interest from commercial property buyers has been exceptionally strong in 2003 and we don't see this abating, despite a recent slight upward rise in interest rates.

"Yields will hold firm in the commercial and industrial markets.

"Industrial yields are at levels not seen for more than 15 years," he said.

"Investors are not being deterred by the record yields achieved. They are readjusting their thinking.

"The strengthening market has also given vendors the opportunity to sell big assets at good prices and this will continue.

"Industrial land values will keep rising in areas like Wiri where they are undervalued.

"More than 40 industrial design/build projects have gone ahead in 2003 and we are predicting a similar number in 2004."

AMP NZ Office Trust executive manager Rob Lang is naturally more enthusiastic about office blocks, owning arguably the best group.

"Our premium and A-grade office portfolio is positioned strongly to continue benefiting from favourable market conditions.

"We own seven of New Zealand's top office buildings and during the 2003 calendar year, leased a record 50,000sq m to reach an occupancy rate of 95 per cent," Lang said.

"The value of the portfolio improved by more than $20 million to $577 million and we anticipate another strong year in 2004."

Barfoot & Thompson Auckland commercial manager Layne Harwood reckons the market will cool slightly next year.

"The rate of immigration increase has declined while the investment performance of alternative asset classes has improved, so fund managers may have to compete more aggressively for asset allocations to property."

Jones Lang LaSalle managing director Peter Coman has a top pick.

"We expect bulk and prime retail to be the best performers, with strong investment demand likely to continue," he said.

"However, rising interest rates may dampen the capital growth expectations of small dollar-value retail investments.

"We expect some parts of the office investment market to reconsider their capital gain expectations, although the CBD vacancy rate should improve in line with continued demand from offshore investors for well-leased, well-located office properties.

"Looking further ahead in Auckland, Britomart, Manson Development's Fort St development, the Viaduct Harbour area and East on Quay will increase supply in the medium term and address growing demand for prime facilities.

"The overall industrial vacancy rate will remain below 6 per cent, and we expect modest rental growth across the sector," Coman said. "Limited land supply and rising land values will put pressure on industrial design build rentals in a number of locations and national infrastructure policy and development will be an area to monitor."

Ray Kingston, managing director of Link International Group, which owns L. J. Hooker Commercial and Business Link, believes the year will rock.

"In terms of the market for businesses, we envisage the current strong sales activity will accelerate. Inquiry from buyers for sound businesses and commercial property is at an unprecedented high and shows no sign of decreasing."

Where the money is

* New Zealanders have $420 billion invested in property.

* We have $229 billion in housing, according to the Property Institute.

* $85 billion is in rural property.

* The balance is in commercial, industrial and retail property.