Firms buy own premises to protect against rent increases

John Church, Bayley's general manager.

A high volume of vacant building sales, mainly to businesses intending to occupy them, has been a major contributor to the improvement in the commercial and industrial property market's performance, says John Church, Bayleys Real Estate's commercial and industrial general manager.

In his introduction to Bayleys' latest Total Property magazine, Church says very low interest rates mean that owner occupiers have been able to borrow to buy at a similar cost to renting and prices have also been attractive.

"While they have flown pretty much under the radar, thousands of sales of vacant buildings to businesses, along with the pick up in leasing activity, has soaked up a lot of empty space over the last few years

"However, if anything this phenomenon appears to be gathering more momentum. An analysis of sales undertaken by Bayleys around the country over the last six weeks shows that close to 60 per cent of those transactions have involved vacant premises. Many of the buyers are small businesses paying scant attention to all the talk about how tough things are and continuing to expand.

"We are now also seeing some businesses buying their own premises to protect themselves against the inevitable rental increases that will result from vacancy rates decreasing further and because - with values rising - investing in property makes good sense."

Church says a shortage of good quality investment property for sale and an improving market is also resulting in more investors buying well located vacant or semi vacant buildings and taking a punt on leasing them up.

He says latest findings from the most comprehensive, independent research done on the New Zealand commercial and industrial property market confirm that the sector has undergone a marked improvement in performance over the last year or so.

"An analysis by the world's leading property research agency Investment Property Databank [IPD] shows our market is among the 10 best performers of the 32 countries it monitors and returns have nudged ahead of Australia for the first time in two years."

Based on a portfolio of nearly $13 billion worth of office, retail and industrial property which is revalued on a quarterly basis, IPD calculates that New Zealand property is currently on average providing total returns of income plus capital growth of 10.6 per cent.."

In an interview in Total Property magazine, IPD's Australasian managing director Anthony De Francesco says he expects returns to keep on improving and for our market to continue to outperform Australia's for the next 12 to 18 months. "While New Zealand's economic fundamentals are not strong as Australia's they are improving in contrast with a weakening trend across the Tasman."

Church says there is still plenty of "upside" in the market, with returns still well shy of their peak of 24 per cent recorded just before the GFC. He says the portfolio which IPD monitors on behalf of the Property Council is predominantly medium to large scale property holdings where income yields tend to be higher (around 8 per cent) than at the smaller to medium sized end of the market.

"However, anecdotal evidence would suggest that capital growth has been higher for prime, lower value stock because there is a larger pool of investors competing for a limited supply of stock."