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Market Comment: Commercial October 2017

General Overview

The local commercial property market has maintained a steady level of sales activity since 2012. Declining yields were noted for well located, securely leased properties with a high seismic rating on the back of historically low interest rates. Analysis is now showing a stabilisation of yields across all sectors. Financiers and investors remain keenly interested in weighted average lease terms and seismic rating in considering the risk profile of any property.

OCR Graph

The Reserve Bank (RBNZ) continues to manipulate the Official Cash Rate intending to control the market and monitor inflation. With earlier inflation running below 1.00%, the Official Cash Rate (OCR) was lowered in November 2016 by 25 basis points to 1.75% with the intention of increasing economic activity and achieving the Reserve Bank’s inflation targets.

 The OCR has been held at 1.75% since November 2016. Recent inflation statistics indicate that CPI inflation for the September 2017 quarter was 1.90% which is back within the RBNZ target range of between 1.00% and 3.00%.

Retail Market

2005 to 2008 – in this period rentals were rising steadily, somewhere between 5-10% pa.

2008 to 2011 – in this period, post the Global Financial Crisis, rentals stopped any form of growth and fringe retail areas even took a few steps backwards. There were few new leases and retail tenants were struggling in the economic environment.

2011 to 2015 – the effects of the Christchurch earthquakes hit hard with massive increases (double to treble) in insurance premiums for older premises. Many tenants couldn’t handle these increases in outgoings and some landlords are known to have offered relief to their tenants as a result.

2016 to date - the market has remained flat with little evidence of rental increases apart from in prime retail locations.

Retail sales in New Zealand increased 5.40 percent in the second quarter of 2017 over the same quarter in the previous year. Retail Sales YoY in New Zealand averaged 3.58% from 1996 until 2017, reaching an all-time high of 10.80% in the first quarter of 2004 and a record low of -7.90% in the first quarter of 2009.

Office Market

In the period following the Global Financial Crisis of 2007/08, rentals stopped any form of growth and there were few new leases. Economic conditions were tough and increased vacancy rates were evidenced. Hard on the heels of this the effects of the Christchurch earthquakes of 2010/11 hit hard with massive increases (double to treble) in insurance premiums payable by tenants for older premises.

Over this period and through to around 2014, some landlords were observed to offer rent or outgoings relief to their existing tenants while the limited market demand for office space witnessed several new lease agreements at reduced rental levels.

There is now a clear differentiation in behaviour between the older and modern office accommodation markets. While older office premises have remained difficult to lease and rental levels have been flat, the market for modern earthquake compliant premises has been a lot stronger with increases seen in rental levels on new lettings and rental reviews.

Industrial Market

The industrial rental market was subdued for several years following the Global Financial Crisis as tenants were seeking to more appropriately match their financial situation with their premises. With few exceptions, industrial rent reviews showed limited growth between 2008 and 2014. Vacancy levels have fallen considerably over the past 24-36 months and as such there is currently a very limited number of industrial premises available for lease on the open market.

In general, rental rates for well-located light industrial/service commercial premises continue to increase as demand edges ahead of supply. Developers are now also seeking a fair return on escalating development costs, which in turn has led to underlying industrial rents increasing over the past 24 months. Older and somewhat dated premises situated in secondary low-profile industrial locations have not witnessed the same level of rental growth.