Immigration boosts commercial property demand

Immigrants and returning Kiwis require industrial and business premises like these in Penrose in which to work.

The commercial property market continues its strong performance, aided by more people immigrating into New Zealand than leaving, says Greg Clarke, general manager of NAI Harcourts.

"Whether people are Kiwis returning or new immigrants, only a small number have the luxury of not needing to work. Industries and businesses still requires premises of some sort - whether a retail shop, office, warehouse or factory - and the reality is that, in most locations, there are not enough new buildings being constructed to satisfy the growing demand," Clarke says.

"Even in places where there is a seemingly an over-supply, the situation can change quickly. An obvious example is the recent 7.8 earthquake which has seen the majority of vacant Wellington office space taken up by tenants having to evacuate damaged buildings."

Clarke says satisfying market demands is extremely difficult in New Zealand, often due to funding requirements. "Unlike many other countries where wealthy developers will progress projects without having occupancy arrangements already confirmed, most developers will require a large amount of space committed to either tenants or buyers before being able to proceed past the planning stage. Add in the time to gain the necessary consents and it is common for it to take two to three years from concept to completion, during which time the market may have changed quite dramatically."

He says the "time issue" is demonstrated by 61 Molesworth Street in Wellington, where the time to demolish the building has been estimated at less than two weeks, while the time to replace the property will be considerable.

While tourism is being hailed as a major growth factor in the country's gross domestic product, there is considerable pressure on tourist accommodation and, in particular, four and five star hotels. "There are a number of hotel developments now planned or underway, and developers are scouring the country seeking suitable sites for further projects."

Clarke says demand for established commercial properties has probably never been greater. "With ever increasing construction costs, we have a situation where prices paid for properties are higher than what they're probably worth - but well below the cost of replacement. In some locations, there are properties that are no longer considered to occupy effective space, but their market value is such that they are too valuable to demolish and replace with a new building."

Clarke says that overall, the commercial property market remains an attractive proposition for investors. "While yields are considerably lower than we have traditionally seen, they are still far more appealing than bank deposits. With no capital gains tax and tenants that in most cases pay all of the operating expenses of a property, the case for investing in commercial is compelling.

"As we close off what has for most been a solid year, 2017 holds the expectation of another great year ahead," Clarke says.

Greg Clarke, NAI Harcourts