Commercial property market told to ‘hang on’

09.03.2011

The commercial property market needs to keep its eyes open in a rapidly changing economic environment, BNZ’s Head of Research Stephen Toplis told Property Council members yesterday. “There is an awful lot to think about,” he said.

Speaking at a Property Council Market Outlook event in Auckland, Mr Toplis said forecasts were changing daily. While there were economic risks arising from the effects of the Christchurch earthquake, substantial economic momentum before the earthquake was one of several positive underlying factors.

In particular, the agriculture sector had been largely unaffected by the earthquake and was expected to perform well over the next 12 months – the beneficiary of record commodity prices and increasing volumes. Manufacturers were also benefiting from a strong export outlook and the very low New Zealand dollar against the Australian dollar.

Apart from the flow on effects of the Christchurch earthquake, rising inflation was by far and away the single biggest threat to the New Zealand economy, he said. Consumer price rises would erode the spending power of households and cost increases would adversely impact corporate profitability.

He said in that regard, it should be noted that the Christchurch earthquake was as much a supply shock as a demand shock for the economy. “On balance, the disaster is inflationary and will eventually put upward pressure on interest rates.”

From the Government’s perspective the costs of the earthquake were particularly vexing. “As it was, the Government’s debt levels were already uncomfortably high, so it was in a position where it needed to avoid more debt by cutting spending.

“The Government will be torn between the need to keep rating agencies off its back by adopting conservative fiscal policy while trying to meet the needs of Christchurch residents. Failure to keep the rating agencies at bay will, unfortunately, result in higher interest rates for all.”

Clearly, in this environment, the retail sector would remain under “substantial duress” for some time, he said.

However, all was not lost. “Global growth is looking up and commodity prices are going nuts. There is economic momentum in New Zealand and the Rugby World Cup will have a positive effect.”

Germany had just recorded its strongest growth in 25 years; Asia was experiencing growth well above average, while the United States was out of recession. “Commodity prices are higher than in the boom of 2008 – prices are going skywards.”

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He said what that meant for the commercial property sector was anything associated Government contraction was not looking positive, but generally, the outlook was modest.

The framework for commercial property was changing, he said. “The issue will not be about location any more, but about quality buildings.”

Colliers International chief executive Mark Synnott agreed. “Some people have been prepared to pay a premium for a green building but this will shift and people will pay a premium for a safe building. No one will pay a premium for a penthouse level in Christchurch; it will be for low rise buildings instead.”

The Auckland commercial property market was at the forefront during 2010, with increasing leasing deals and sales activity, Mr Synnott said.

Colliers International Auckland market outlook for the first quarter of 2011 showed that Auckland was almost out of the trough. Mr Synnott said he did not believe that the worst predictions of vacancy rates at about 13 to 15 per cent would occur.

He said high net worth individuals and the Asian investment market were active in Auckland and the listed property sector would follow where there was good opportunity. “Australians are looking at their own market.”

The commercial property market was likely to improve by 2013, he said. “It’s not all bad if you can hang on.”

END.

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