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Stronger for longer in Auckland as yields continue to firm

Stronger for longer in Auckland as yields continue to firm


- Top of cycle containment of excesses sees elongated flatter tailing off -

Auckland – The Auckland commercial property market continues to retain its buoyancy, despite typical late cycle behaviour driven by tightening credit conditions, capacity constraints and labour shortages, according to CBRE’s latest Marketview report.

As of March 2017, office yields compressed by 0.22%, currently sitting at 6.41% for prime and 7.16% for secondary. Industrial yields are down 0.72%, reaching 5.51% for Prime and 6.56% for Secondary and retail centre yields are down 0.24%.

In the office market, vacancy movements have been dominated by two developments in particular, 125 Queen Street where approximately 5,000 m2 was taken up by tenants and the new Datacom Building in Wynyard Quarter where the company has taken 13,000 m2 of the 15,000 m2 available.

Both contributed to positive absorption of 5,380m2 across the office market for the half year to June 2017 as a result. Equally, a large portion of the vacant space in the market still remains in both buildings, contributing to a vacancy increase in the CBD of 8.2%.

Senior Director and Head of Research for CBRE New Zealand, Zoltan Moricz says although the current balance of supply and demand points towards positive absorption pressures for the market, there is risk that business investment in capacity will be constrained by credit.

“This may lead to greater pressures emerging on leasing incentives to fund upfront costs of expansion/relocation and will adopt emerging workpace practices offering efficiency and flexibility.”

“CBD office yields continued to firm across all submarkets indicating continued demand for CBD assets by low geared private and institutional investors.

Prime and secondary net effective rents both decreased in Q2 2017 with prime weaker than secondary due to the expected impact of forthcoming supply and occupier relocations, according to the report.

Land value increases continue to persist in the industrial market with a quarter on quarter increase of 3.2% due predominantly to restricted availability in more highly sought after industrial locations. Industrial land values having now also increased at a 7.0% annual average rate over the past five years reaching $477 per m2 in June.

A new benchmark has also been reached for Prime yields in the industrial market, according to the report, with transactional evidence below 5.0%. On the rental front, both prime and secondary industrial stock displayed increases as demonstrated by the benchmark of $130 for warehouse being seen in a wider range of suburbs compared with just a few s six months ago.

Retail sales in Q2 2017 continue to benefit from net migration, favourable economic conditions, tourism and the entrance of global brands reflecting an increase of 6.3% on the period last year binging the rolling annual total of Auckland’s retail trade to $32 billion.

The report notes that the CBD continues to see the greatest demand pressure on available supply as international brands struggle to be accommodated with the current stock of space and little happening in the short term with new supply not likely to peak until 2019/2020 when Commercial Bay is developed.

Moricz says in summary, it is these fundamentals in retail and the other markets which suggest that the current cycle could be more elongated than in previous periods when market peaks were followed by sizeable corrections.

“While the economy was weaker in Q1 than expected, consensus forecasts of New Zealand GDP growth rates for 2017 and 2018 remain at circa 3% pa still above the developed world average. Credit conditions remain tight and this will have dampening impacts on both the occupier and investment sides of the property market however there is still plenty of liquidity and we don’t see an adverse impact on yields in the short term.”

ENDS

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