Chiefs are cautiously optimistic

Mike Bayley. Photo / Supplied

Most chief executives of the major commercial and industrial property real estate agencies are quietly optimistic about a steady or improving market this year tempered with concerns about what effect the euro-crisis will have on the international and domestic markets.

"The portents for the commercial and industrial property market for this year look promising given 2011 ended very strongly for this segment of our business," says Mike Bayley, managing director for Bayleys Real Estate. "Our traditional big end-of-the year Auckland Total Property auction in December was one of our most successful ever, with 28 retail, industrial and office offerings selling at a clearance rate in excess of 75 per cent," he says. "There was also good interest being shown in a number of larger $20 million-plus properties up for tender."

Bayley says the fundamentals behind the gradual property market recovery experienced over the past 18 months or so are expected to remain in place in 2012. "These include low interest rates - stimulating both investor and owner-occupier activity - attractive income returns, a lack of new building activity and moderate pick up in leasing activity which in combination are nudging vacancy rates down, plus the re-election of a National-led Government."

Bayley expects investors from Southeast Asia and China to remain the predominant purchasers of higher value properties.

He believes an increased number of syndicated offerings can be expected in 2012 but cautions investors should be careful and look beyond just the cash return being promoted and at the quality of the property and its tenant, the lease length and the track record of the syndicator and manager.

A major concern is global economic uncertainty and the impact this could have on financial and investment markets. How deeply this will impact on investor confidence is unknown but it does represent a significant potential impediment to the continued recovery of New Zealand's economy - and hence the commercial property market - in 2012."

The same concern is echoed by Mark Synnott, chief executive of Colliers International who says the economic environment this year "is as foggy as ever and not helped by the European situation".

The biggest effects of the economic uncertainty will be on the leasing area, where businesses owned by offshore parent companies may delay decision-making. "In New Zealand and Australia, sluggish GDP growth forecasts and stalled total investment returns encourage a cautious attitude to our property value growth forecasts," he says.

"We anticipate a continuation of the trend for major corporates to outsource their portfolio lease management activities in order to reduce costs and improve efficiencies."

Synnott predicts modest rental growth in the Auckland industrial market over the course of 2012, along with a robust recovery in industrial capital values. "We expect industrial vacancy rates in the three main centres to decline slightly over 2012."

Synnott says Colliers does not have the same optimism in regard to the outlook for the office property market nationwide. "The signals do not yet point to a sustained recovery but to stability. We are not seeing much sign of positive net absorption in any of New Zealand's CBD markets. Instead, tenants are tending to upgrade the quality of their premises without significant rental increases."

With no new high-rise towers planned, enormous "churn" is to be expected in the market with multinational tenants mandating that they must occupy buildings which meet earthquake-resistance requirements. "Mansons TCLM has just completed quality low-rise developments in Victoria St and Napier St, and is well-positioned to take advantage of this."

Synnott anticipates that yields will hold steady over the next 12 months, as fewer properties are expected to come on to the market.

In relation to the retail property market, he expects positive growth in the retail property market in Auckland over the course of 2012, with a steady level of retail sales activity to continue nationwide and yields remaining constant this year.

"Last year saw the Apex Megacentre in Mt Wellington finalise leasing, complete construction, open and trade successfully then sell to an offshore buyer. Several new offshore retailers entered the market including Mothercare, a full-format store; and Fishing Camping & Outdoors opened 10 new stores around New Zealand. Colliers is working on six major new retail developments, four of them in Auckland owing to the strong population growth here, and we anticipate that the majority of these will go live in 2012."

John Urlich, manager of Barfoot & Thompson Commercial says providing an accurate assessment of the market demand for real estate and real estate services in 2012 will prove as difficult as at any time over the last three years.

"Globally we have been fortunate to benefit from the activity in the Asia Pacific economies, and despite uncertainties and the Christchurch earthquake, the first six months of this financial year mirrored global trends with a good momentum across our sector. Generally the net absorption of vacant space has shown encouraging signs. Of late however there has been increased economic uncertainty and slow economic growth which is resulting in lower consumer and business confidence. The likely upshot for property in this continuing low interest rate environment will be that 'quality' will continue to endure.

"If I was to predict an increase in development I would have to say that it will be led by the residential sector first. The dynamics of that market means that we will see a great number of new residential subdivisions and proposed developments undertaken by a number of typically commercial-based firms."

Bruce Whillans, managing director for Ray White Commercial in Auckland says he is quietly confident that New Zealand's commercial property market will continue to show positive signs of improvement over the coming year.

"With our major trading partners still showing respectable growth, population pressure in Auckland, the Christchurch rebuild and no significant 80s style overhang, New Zealand is relatively well positioned as we move into 2012," Whillans says.

"As with the last 12 months private investors will continue to dominate the investment landscape with fund managers unlikely to re-weight into property in the near future. We do, however, expect to see re-weighting within existing listed portfolios, but not a broad based return of the listed property trusts as buyers."

He says Ray White Commercial also expects continued interest from offshore investors who view New Zealand as a global safe haven away from the turbulence of Europe and America. "On the development front, we are seeing large scale opportunities like SOHO Square and Victoria Quarter re-priced and presented to the market, as prime lenders draw lines in the sand and crystallise their positions."

Whillans feels the current low interest rate regime coupled with the emergence of under-the-radar underwriters is beginning to breathe new life into the development landscape. "We are already fielding inquiry from South Island investors capitalising on Christchurch earthquake insurance payouts looking to diversify their geographic base."

The Auckland CBD office market led a staged recovery in the second half of 2011 with "smart money" taking advantage of pricing and future growth opportunities, supported by the lack of planned CBD office development.

Whillans says an oversupply of secondary retail in Auckland's CBD is likely to lead to an easing of rates and vacancies in this sector over 2012-13. "This will become more apparent over the next 12-18 months with 200 plus retail strata units coming on stream."

Senior managing director for CBRE in New Zealand, Brent McGregor, says a considerable proportion of the larger property deals in 2011 were in the hotel market. "This is likely to continue in 2012 with sustained off-shore interest," he says.

"Debt funding assets, with short average lease terms will continue to prove challenging and these assets as well as troubled property will continue to represent some of the best buying opportunities going in to 2012. These assets won't fit the buying profile for syndicators or institutions, so the acquisitions will remain the domain of opportunistic private buyers."

McGregor thinks commercial property transaction volumes should improve markedly from the eight year lows experienced in 2011. "Private buyer interest from Asia will continue to push the mid market CBD investment product in Auckland and we are likely to see a small number of off shore institutional players entering the prime investment space." He also agrees that the low interest rate environment will assist the continued growth in transaction numbers.

"The strong corporate leasing activity we have seen in 2011 could slow down slightly in 2012 due to continued weak global economic conditions. Offsetting this 2012 will see more corporate tenant lease expiries, although they are of a smaller average size than in 2011." McGregor says overall "it looks like we'll see less take across more deals".

Nick Hargreaves, managing director at Jones Lang LaSalle says 2011 will be remembered as the start of the next property cycle. "Many corporates and individuals are likely to have significantly better balance sheets, stronger growth prospects with directive and motive to enact on decisions left in abeyance since the market downturn. This is despite the softer economic growth projected domestically and instability recently exhibited in international markets."

He believes the banking sector appetite for property is likely to lift due to reduced volitality in values, a re-weighting towards the property sector in most areas and a willingness to grow their loan sheets in a highly competitive market.

"The retail sector, especially at the prime end, will continue to grow from its quick recalibration over 2011 and experience positive rental growth while the industrial sector, which was first out of the recovery, is likely to enter a holding pattern with sufficient levels of supply." The industrial sector will also be constrained by a lack of land availability and the owner-occupier market, is likely to play a more important role. The office sector will be highly competitive characterised by stronger demand with a complex supply situation. As a result, Auckland leasing incentives in quality CBD buildings will cool further.

Richard Laery, general manager of NAI Harcourts, says the Christchurch rebuild this year will deliver many benefits to the New Zealand economy and business community as a whole. "As the importation of many products required to rebuild the city begins, we anticipate an increase in the lease and occupancy rates around the country as the construction industry stores stock for contracts for this new year."

Laery says NAI Harcourts' forecast is "for a gradual and definitely improving environment for all sectors of the real estate market" but he reiterates the concerns of other agency leaders in relation to "ongoing problems in Europe, a weak USA, and a slowing Asian economy." While he doesn't see the New Zealand commercial property markets "heading into a new boom in 2012" Laery says that, "regardless of the market, we expect 2012 to be a good year for our clients."