Macro Property Market Report 21 | 31 July 2015

Macro Property Market Report 21 | 31 July 2015

Hawke’s Bay based Turley & Co is continuously engaged in commercial property analysis and valuation as a Registered Valuer and Registered Property Consultant.
Turley & Co since 1998 is a provider of high-quality property valuation and consultancy services nationally. 2009-15 as non-agency principal property strategist TCL project led property disposals of plus $27M and acquisitions plus $84M for private (corporate) and Council and Crown clients – since 1998 acquisitions-disposals nationally $455M.

Published 5 August 2015
CONTENTS
MACRO MARKET | DEVELOPMENT ACTIVITY | NATIONAL CAP RATES | OUTLOOK 3
Development | Napier-Hastings-Havelock North 3
National Cap Rates | Yields 5
TCL Outlook 2015-16 6
APPENDIX 1 | DISCLAIMER & CAUTION 13

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Macro Market | Development Activity | National Cap Rates | Outlook

Overview
Unequal fortunes have been a feature regionally for NZ. Auckland’s property market is overheated and Canterbury economic activity is substantial. Many provinces including Hawke’s Bay are still lagging.

Low interest rates (borrowing under 5% currently), are likely to cause investors to chase yields down (thus values higher). There has been an unprecedented level of incoming overseas capital principally in Auckland including some offshore buyers speculating on property. Nationally property values of good investment characteristics continue to sell very well, below 6% - refer to National Cap Rates.

Soaring or high land values in Auckland undermine the feasibility of development. Statutory and other compliance (Resource Consents) is adding significant costs and time delay. Ongoing construction costs inflation will have market valuation ripple effects for property (an observation consistent with Turley & Co commentaries 2011-15).

As observed by us since 2009: there was a significant shift towards greater differentiation for commercial-industrial property considerations: location, building quality, versatility, age, tenant surety, lease quality, term certain and since 2011, building seismic performance. The 2015 yield spread of plus 3-5% is considerably greater than applied pre-GFC albeit this is now tightening (reducing) for mid-risk property.

NZ economy commercial-industrial property effects will be assisted by a lower Kiwi dollar and lower interest rates but pulling against this is a confidence and dairy downturn. The elephant in the room is possibly Auckland residential property market risks for the economy. Market participants eying international effects for NZ will be considering a jagged situation for Greece and Europe, the China stock market spill and Australia’s economic challenges. US economic recovery and other well-performing economies offer light and optimism, and opportunities.

Development | Napier-Hastings-Havelock North

Development Activity 2015
At mid-2015 for Hawke’s Bay commercial-industrial property:

Seismic performance (NBS rating) is a lead factor in a considerable amount of commercial property activity since 2012.
Seismic performance has caused pain and opportunity, with increasingly tenant-led strengthening, relocations and development.
Structural strengthening techniques are continually evolving offering opportunities for investors/ developers.
Modern construction corporate tenanted property investments are keenly-sought and prime property values continue to firm.
Some Hawke’s Bay retail localities are experiencing rental growth. However, overall Hawke’s Bay commercial-industrial rents remain flat at best after 4-5 years of mostly downward pressure (the notable exception is new development cost-related rents).
Building costs inflation is having an increasing influence on values (new accommodation foremost).
Most land values remain considerably off their peak and for the most part continue to moderate or are now static (with a few exceptions).

Current and recently completed Hawke’s Bay developments include:

The foregoing plus other activity in recent years point to a development boom for Hawke’s Bay commercial-industrial property.

National Cap Rates | Yields
Sample national commercial-industrial property investment sales tracked by Turley & Co and our professional partners include (inserted is a partial set of information tracked by TCL):

Refer to Hawke’s Bay cap rates/ yields in separate Office, Industrial and Retail Reports.

Refer to Turley & Co for information more specific to a particular property and for Registered Valuer and Registered Property Consultant advisory www.turley.co.nz

TCL Outlook 2015-16

As observed previously: Cap rates for property are fixed interest yields and borrowing costs influenced (and other influences affected). All other factors being equal sustained lower interest rates usually give rise to lower cap rates (increased property values). Given sustained reduced interest rates and broadly better economic conditions, some investment property is likely to see even firmer yields 2015-16. We believe the cap rate trend is most probably increasingly downward (thus values trending higher). The necessary obvious caveat is the state of broader economic conditions and in particular confidence.

In January 2013 we reported for Hawke’s Bay: There are very early signs relative to economic data and confidence surveys information … of longstanding economic malaise giving way to improved activity and confidence ... If this is correct we may have finally turned the corner. Trends for commercial and industrial property could be expected to improve albeit lagging …

The economic recovery lag has been much longer than expected for most Hawke’s Bay commercial-industrial property. Our view in 2008-09 was 5-years of fallout adjustment that is 7-years albeit underscored by some significantly positive Hawke’s Bay development activity (see earlier). Napier-Hastings population growth in 2014 outgrew the prior year’s change by 141% (0.39% to 0.94% change), business confidence levels by mid-2015 were largely positive and predicted were possibly OCR reductions.

Hawke’s Bay media in 2015 are reporting more job opportunities advertised and the local residential housing market is experiencing a shortage of properties and some considerable localised heat for the first time in 7 years. We note local manufacturing and pipfruit related industries fortunes have improved. Most anecdotal evidence and key indicators point upwards. Trends for Hawke’s Bay commercial-industrial property could be expected to improve in 2015-16.

The current situation of much lower dairy prices and flagging consumer confidence is an economic performance risk. However, we anticipate this will be much if not totally countered by lower interest rates and a more moderate Kiwi dollar value – if sustained these factors will most likely be a major broader economy offset to milk prices doom-and-gloom and Auckland residential property market implosion jitters. Auckland has a problem clearly.

Hawke’s Bay commercial-industrial rents to be influenced by improving demand in some quarters and construction costs inflation – new building prices will continue to lead and ultimately bolster some existing premises values (rent and also capital values potentially augmented by lower cap rates).

2013-15 has seen considerable Hawke’s Bay commercial-industrial development activity. The supply of new and proposed developments generally throws the weight of the market to tenants however; potentially less so moving into 2016-17.
The Hawke’s Bay commercial-industrial property market is probably by-and-large moving off an overstated and long malaise period low base.

Market outcomes for property are a function of globally influenced local conditions. Property market predictions with good certainty are impossible. Our projections are wholly speculative and may prove incorrect.

Gross rent or TOC (Total Occupancy Cost) rates cited in this report include primary tenancy outgoings: Council rates, building insurance and unique occupancy costs. Tenancy opex are excluded from TOC.

TOC rates reflect a sealed bare shell by deducting the estimated market added value of landlord fitout: flooring treatments, subdivision partitioning, air-conditioning, etc.

TOC rates are also net of car parking and possibly excess yard value and are often stated net of corner site added value.

TOC rates generally reflect effective rates so are adjusted for the value of known letting inducements (frequently a market feature in but often undisclosed).

TOC rate definitions apply for all sample rent evidence cited in this report. Reliable and rates safe interpretation requires Turley & Co Registered Valuer input www.turley.co.nz

Report Users Caution | Disclaimers

Report Users Caution
Please refer to the user terms and cautions Appendix 1.

Sources | Reliability
Turley & Co has been a valuer analyst or advisor for many of the cited transactions. We have otherwise gained data from thought to be reliable sources. TCL cannot guarantee the accuracy or reliability of all market data recorded in this report.

Caution | Sample Data
Rent samples are incomplete and include: dated existing and newly-built premises, ground and upper-floor, first-lettings and sitting-tenant agreements, properties of differing location strength, scale, lease content, seismic status, etc. These items are relative market value considerable influences. Without Registered Valuer assistance the value rates cited in this report may be incorrectly interpreted. The same caution applies for cited cap rates (yields).

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