Property Council says there must be a clear signalling and decisions by Auckland Council to meet business demand

The Property Council New Zealand is concerned that the Proposed Auckland Unitary Plan provides too little land for the city's commercial development.

"This is a vital issue, with significant ramifications for Auckland's future employment, business and economic growth," the council says.

The same view is expressed by Bayleys and is supported by research undertaken by Colliers International - respectively two of the nation's biggest real estate agencies.

"The industrial property development sector is hindered by both a lack of available industrially zoned land and the values which such land now commands," says Ian Little, analyst with Bayleys Research.


The Property Council says it is urging the Auckland Council to carefully assess the location and type of activities in business zoned land.

This is necessary "to avoid adverse impacts on the vitality of the existing city centre, metropolitan, town and local centres.

"This could be exacerbated by residential building activity encouraged on land where business activities should logically have been allowed to grow to support the demand generated by residential growth - resulting in suboptimal outcomes."

The Property Council says it supports the Proposed Unitary Plan's promotion of business activity around the Auckland International Airport at Mangere and the theoretical capacity for business development in the Auckland CBD, metropolitan centres and town centres.

"However in practice, taking into account development realities, there will probably be a shortage of sufficiently available business land in the medium to long term across Auckland."

The council says the latest Capacity for Growth Study (CfG) undertaken by the Auckland Council states that there are 1875ha of vacant business land and vacant potential land.

"However, research by Colliers International suggests that this may be overstated and there is less than 800ha of land currently available for industrial development," the Property Council says.

"If annual long-term absorption rates settle at 50ha per year, Auckland would require around 950ha of land between 2012 and 2031. With the market heating, absorption rates could be significantly higher. Between 1996 and 2006, annual business land absorption rates reached 113ha."

The Property Council says "there is currently insufficient vacant industrial land to cater for this demand and Auckland Council must prioritise making greenfield and vacant potential structure-planned/special-zones available. Even more so if absorption rates start to drift higher."

Property Council chief executive Connal Townsend says there needs to be a clear signalling and timely decisions by Auckland Council, so that the commercial property development industry has certainty.

"Given the fluctuation in the absorption rates within cycles, the timing of release of land will need to be carefully monitored," Townsend says.

He notes that 60 per cent of vacant business parcels in the urban area are less than 1000sq m in size with limited vacant business parcels over one hectare.

"A lack of large vacant sites and a shortfall of vacant greenfield land for business use in the region limits options for firms looking to locate large-scale, land-extensive activities."

Most land available for industrial development is in South Auckland. "This could lead to a shift in employment clusters, and absorption rates are likely to be therefore higher in this area - both of which should be properly accounted for by the Auckland Council."

Townsend says the serious issues of a lack of land for commercial purposes highlight the importance of undertaking robust and timely assessments to meet future business requirements.

The Auckland Council needed to ensure it was "not overly reliant on theoretical modelling and predictions" that are not undertaken on a regular basis. "Market realities and practical considerations are key and must be accounted for in this respect."

Bayleys Research analyst Ian Little says the past two quarters have seen land values in Greater Auckland's industrial zones climbing sharply.

"This reflects the general lack of land supply within established precincts and the extremely limited amount of such land being brought to market," he says.

"Land values in leading precincts such as the Airport Corridor and East Tamaki have now exceeded their pre GFC (global financial crisis) peaks - making speculative industrial development financially unviable.

"For example, an 8900sq m development site in Pavilion Drive in the airport corridor precinct recently sold at a price equating to $345 per sq m. A comparable land holding sold some 18 months ago for approximately $315 per sq m. Immediately pre GFC, such land would have commanded a value of $250-$270 per sq m. Meanwhile, in nearby East Tamaki, land in Cryers Rd recently sold for $400 per sq m."

Little says the increased costs act as a deterrent to development - particularly on a speculative basis.

"With these values, the cost to develop industrial premises built to current standards and specifications is in the region of $2250 per sq m. It is unsurprising that the sales value of existing premises has risen from around $1200 per sq m in 2011 to a current level of between $1500 per sq m and $1600 per sq m - with further increases expected."

Little says that a majority of development activity, "despite the tightening of the market", continues to be through the design-build route. "There are, however, some developers who continue to be able to provide speculatively developed schemes," he says.

"As a general rule these are individuals or companies which have land holdings they have owned for an extended period of time, thereby negating the requirement to recover the costs of current land values needed to make their schemes viable."

Goodman Property Trust, for example, was currently developing a new 6260sq m warehouse premises at Highbrook Business Park due for completion in June.

The building, at Business Parade North, would provide a high-stud warehouse with a minimum 10 metre clearance, 400sq m of offices and a 750sq m canopy. Auckland International Airport was also expanding on its speculative development programme.

The airport company recently developed a location named Flex - a warehouse and office development providing 10 small-to-medium-sized units originally offered on flexible leasing terms.

Just one year since completion, Flex was at 100 per cent occupancy. The airport company planned to replicate this success with a further 7280sq m of office and warehouse split into eight units.

The airport company was further developing a duplex property located in The Landing precinct with 6810sq m of office and warehouse space split into two tenancies having an expected completion date of early 2015.

The warehouse was due to be completed next month and would offer high-stud industrial space close to New Zealand's largest transport hub with good operational areas, a large canopy and an office overlooking the yard area.

"A rise in rental values has been particularly pronounced at the higher end of the quality scale - with high stud, clear span warehouses attracting the highest rents due to their greater cubic capacity and lower cost per pallet position," Little says.

"The widening rental band has, as a result, forced companies to carefully assess their requirements before committing to leases. Many firms do not necessarily require high-stud warehouses and can operate effectively from mid-height premises."

Little says that, according to Bayleys Research statistics, the median yield sales from industrial property investment in Auckland in the final quarter of 2013 was 7.8 per cent.

He says the median yield figure has sat in a tight band between 7.5 and 7.8 per cent since the September quarter of 2012 - having fallen from over 8 per cent in June of 2011.

"Yields softened rapidly at the onset of the GFC and New Zealand's recession in late 2007 with the median yield increasing from 7.5 per cent in the September quarter to a peak of 8.9 per cent in the third quarter of 2010.

"The increase in the median yield reflected the greater risk which characterised the industrial property market at the time as vacancy rates increased and rental levels fell. Over recent months, however, as the economy has strengthened, the leasing market has tightened and rental growth has returned to the market.

"With the Reserve Bank of New Zealand now increasing the official cash rate and the consequential effect that will have on mortgage rates, it is likely that yields will begin to soften."