Industrial land leads the way in pickup of commercial market

Gerald Rundle. Photo / Supplied

Industrial property continues to lead the commercial property market recovery ahead of the office and retail sectors, according to the latest reports.

The June 2011 quarter results from the Investment Property Databank/ Property Council performance indices, released this week, show total returns (income return plus capital gain/loss) across all of the sectors of the market was 5.9 per cent.

However, industrial property recorded a return of 9.1 per cent, with an income return recorded at 8.8 per cent and an increase in asset values of 0.3 per cent.

Gerald Rundle, manager of Bayleys Research, says industrial property has traditionally led recoveries because it is the "productive" sector which breaks out of recessions first, followed by the service (office) and retail sectors. "This is particularly true of the current export-led recovery of the New Zealand economy," Rundle says.

Office and retail property returns, while still positive, included asset value losses of 3.4 per cent and 3.7 per cent respectively, which are offsetting income returns of 8 per cent to 9 per cent. 'These returns illustrate that industrial yields and rents have now by and large fully adjusted following the global financial crisis, while the office and retail sectors are still seeing some adjustment in these variables and at a far more moderate pace," says Rundle.

He says there has been a pickup in commercial and industrial property activity levels since mid 2010, particularly for properties up to $5 million. The growing recovery in the industrial sector, led by Auckland, is also evident with the renewed interest in securing development opportunities, says Rundle.

As vacancy rates tighten, sales activity around vacant industrial land has lifted. Prices have recovered off the lows seen following the global financial crisis, but are still about 40 per cent down on their peaks. "These lower land values offer developers the opportunity to provide tenants with premises that are aligned with the industrial rental levels now prevailing in the market," says Rundle.

"Stabilising rentals, diminishing vacancy levels, increased tenant demand and adjusted land values mean new development has become increasingly viable.

"Cash-rich land-bankers are also returning to the market, believing it is moving out of the bottom of the cycle and viewing this as eventually pushing land prices up further."

A key growth area for the Auckland CBD market is the education sector. It is currently the largest user of space in the CBD, ahead of the legal and banking sectors, and recent market activity shows it is growing again after a period of decline.

Bayleys Research says 2011 and 2012 should see continuing improvement in the commercial and industrial property market as the economy recovers. With construction largely on hold in the office sector and tenant growth improving, particularly in the Auckland market, office vacancy is seen as having peaked in the first half of this year, Rundle says. This reduction in vacancy will initially be at the prime end of the market.

"The industrial sector is expected to be the first to show significant renewed development activity and this expectation will continue to drive sales of industrially zoned land," says Rundle.

"Land price growth will be constrained by the economics around development costs and rental levels, but it is expected that industrial land prices will carry on edging upwards in the foreseeable future."