Property index shows slow, steady market conditions ahead

MEDIA RELEASE 1/6/2011 [6pm]

Property index shows slow, steady market conditions ahead

The commercial property market is still recovering, but the pace of recovery is slowing, according to the latest Property Council/IPD New Zealand Property Index.

For the year ending March 2011, the index recorded a total return of 5.9 per cent, which is a substantially lower return against the long-run return of 10 per cent. The total return comprises 8.3 per cent income return and negative 2.2 per cent capital growth.

Property Council chief executive Connal Townsend said the results indicated a levelling out in a continuing recovery cycle. “The index results will give investors some degree of confidence of a slow, steady recovery.”

Managing director of IPD in Australia and New Zealand Anthony De Francesco said the results suggested the overall commercial property market was moderating, with the speed of the upswing slowing. “This is supported by various macroeconomic indicators (such as employment growth and retail sales growth), which are pointing towards a soft economic outlook over the short-term.”

However, Mr De Francesco said the speed of the recovery would continue to vary across sectors, with the industrial sector continuing to outperform retail and office due to relatively favourable market conditions.

The office, retail and industrial sectors recorded annual total returns of 4.9 per cent, 4.9 per cent and 9.2 per cent respectively. The office sector reported a larger income return and retail showed lower capital growth declines.

Mr De Francesco said the average cap rate for the commercial property market was 8.4 per cent, which had remained relatively steady at that value for the past two years. “Over the short-term, average cap rates for the overall commercial property market are likely to remain steady.

“This will be underpinned by on-going unfavourable capital market conditions and a softening in the economic climate. However, cap rate dynamics are likely to vary across sectors.”

Mr De Francisco released the results at a Property Council market outlook event in Auckland today, which included presentations from consultant Ed Schuck, principal of Fidato Advisory on the role of Real Estate in institutional portfolios and interest in unlisted assets, and Bayleys Realty Group manager of research Gerard Rundle about current market conditions. Mr Rundle said the commercial property market was in the midst of a slow, steady recovery that he expected to continue until 2012.

“We’re coming out of a difficult time, so it’s quite surprising that four years after the Global Financial Crisis (GFC) we’re talking about recovery.” Mr Rundle said activity levels were increasing, particularly in Auckland. “We are predominantly seeing a higher level of confidence in the market through increasing activity in areas that we haven’t seen for a while, including land sales of large blocks of land – even at discounted prices.”

Sales were occurring in well known business areas such as the North Shore and Mount Wellington, along with some Greenfield sales on the fringe. This reflected the relative strength of the industrial sector, to retail and office property.

“It’s telling us that going forward, the industrial sector will see new development occur ahead of the other sectors.”

While pricing and yields were not yet picking up, more people were getting involved in the commercial property market again, he said.

“Looking out to 2012, we don’t anticipate significant change.”

END.

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