market report - commerical/industrial

Economic Commentary

In determining a current market value of the subject property we are required to be cognisant of underlying economic conditions and the flow on implications these may have to investment and divestment decision making across the broader property markets. 

The world economy has remained on centre stage for the last two years. The credit crunch that ravaged financial markets has now gone to work on real economies. 

We have seen the likes of Australia come through reasonably unscathed.  At the other end of the spectrum, a number of European countries, of which Greece is the worst, are in extreme difficulties.  Within New Zealand, recovery to date has been patchy.  It is the opinion of some economists that the building blocks for a stronger upturn are moving into place, although this is subject to the global economy not taking another backwards step. 

From a property perspective, one of the building blocks is the requirement of the New Zealand economy to continue deleveraging.  This is a growth suppressant in the near term, with it holding the housing market in check.  The deleveraging process however is required if the upturn is to gain strength.

The first indicators of improved growth is the fall in unemployment rates.  This has lead to optimism in the economy of better prospects in 2011.

Market Commentary:

The commercial investment market, whilst remaining at an adequate level, has taken more consideration of risk over the last 12 months.

The market remains relatively strong for properties with good tenants on long-tern leases.  This is demonstrated the sale of 208 Maunganui Road, which sold at a 5.8% return.

As the standard of tenancy declines, the rate of return rises sharply.  To this extent, we have seen approximately 9% paid for 100 Spring Street, which was partly vacant.  The recent sale in December of a commercial property in Taupo Avenue which was virtually vacant, reflected 13%.  Even the sale of 124 Maleme Street, which had a five-year term remaining on their lease with an engineering company as tenant, sold at an 8% return. 

Multi-tenanted buildings, in good condition and in a good locality are tending to perform slightly better than single tenancy buildings.  Obviously, purchasers see this as being the case of spreading one’s risk.

The reality is that the market is now correctly assessing risk.  With higher risk comes a higher capitalisation rate.

Over the last 12 months, in line with a fall in the Official Cash Rate, term deposit rates have fallen considerably.  Property investment in income producing assets has looked attractive and as discussed above, investors are prepared to pay around 6% for low-risk returns.  Lease covenants are however of prime importance with those properties leased to established national companies, or on a long-term, sell at the best capitalisation rates.

The market however for development properties with no cash flow has remained very weak.  Funding for such properties is now very much an issue with the demise of the finance companies.  Banks will generally not lend for the capitalisation of interest and any developer requiring funding needs to have an income stream to meet interest repayments.  The major banks appear to be only lending 40% to 50% on such development projects.

There are some developers with uncompleted projects who have been left with high interest rates and minimal ability to refinance. 

Further, prices in the upper price bracket, over $3,000,000, all tend to be selling at higher returns.  Recently we have seen 1 Elizabeth Street sell at a 9% return.  We have also seen returns this year of 8.9% for the Carter premises while the former Design Mobel factory sold for $3,300,000, or a 10.6% return.  At the same time two cheaper industrial workshops sold at 7.4% and 8% respectively.  Both of these were under very short-term leases.

Mount Maunganui properties have over the last decade have tended to sell at lower rates than those in Tauranga.  We often saw yields of 5% to 5.5%.  The recent sales have shown a slight easing and we would expect this range now to be in the order of 5.5% to 6.5%.

Owner/occupiers tend to purchase at returns at the cheaper end of the spectrum with a range of 6% to 7% yield.  Properties in this range tend to be under the $1,000,000 price bracket. 

It is our opinion that capitalisation rates and yields in Tauranga tend to be lower than other major centres in New Zealand.  This is a result of the continual high demand to buy commercial property within the city with a large number of investors living in Tauranga.  Outside investors perceive the city to be a growth centre.

In summary, the tenant and length of lease are of prime concern in this market.  We believe purchasers are reflecting the fact that it is more difficult to obtain tenant in what is a poor market.  When rents are slightly above market, if there is a strong long-term lease there will still be reasonable demand.
 
Overall, we see that top quality property has probably eased in capitalisation rates by 0.5% to 1.5% in the last 18 months.  We are now seeing top quality property, in the lower price bracket, still selling in the range of 6% to 6.5%.  Two years ago these properties sold at under 6%.  As the price bracket increases, we see a rising in returns with the market particularly weak over $3,000,000.  In the most recent sales we have seen returns of 8.96% and 10.6%, an increase of 1.5% to 2%.  Further, where the tenancies are poor, we have seen increases of 2% to 4% in capitalisation rate with the range now 7.5% to 11%.