Falling capitalisation helps drive commercial property up

Thursday, 5 March 2015

Media statement by James Kellow – Director of New Zealand Mortgages & Securities

Falling capitalisation rates help drive commercial property values up

Auckland property financier James Kellow says many of the best commercial properties in and around Auckland are now selling well below the ‘standard’ seven percent capitalisation rate.

“The value of commercial properties in Auckland has continued to improve steadily over the past five years. This has been driven by the likes of rising commercial rents, strong occupancy and low interest rates. So what we’re seeing now are the top-end properties selling well below the ‘standard’ seven percent cap rate.

“The catchcry now around the commercial property market is that 6% is the new 7% cap rate. Let’s not forget that a just few years back closer to 8% was the expectation by property owners and developers,” says Mr Kellow.

The capitalisation rate, often just called the cap rate, is the ratio of net operating income to property asset value – a tool commonly used to determine value in the commercial property sector.

Mr Kellow says a property with a rental of $100,000 sold at a 7% cap rate would command a sale price of about $1.4m, while at a lesser cap rate of 6% it would fetch about $1.65m.

“So falling cap rates are good news for commercial property owners as it shows values are driving upwards and the market is heating up. We’re seeing many Auckland properties now receiving multiple offers from both local and offshore buyers.”

On investor yields, Mr Kellow notes that while they’re generally dropping all around the world, commercial property is still generally showing much better returns than bank deposit and bond rates.

“On cap rates, I think we’ll see them continue to compress partly driven by the widely anticipated reduction in interest rates this year.”

He believes one sure sign that interest rates will continue to fall throughout 2015 is the relatively high servicing cost of the New Zealand Government’s net sovereign debt. He says interestingly Ireland can borrow at less than a third of the rate our government can despite Ireland’s similar GDP and the fact that it has three times the net national debt.

ABOUT NZMS: New Zealand Mortgages & Securities (NZMS) is a joint venture between Mansons TCLM and Mr Kellow, a Specialist Property Financier. Mansons TCLM, helmed by Ted Manson ONZM, is one of New Zealand’s most successful and long standing developers whose business has built more Green Star rated commercial buildings than anyone else in the country. The privately owned NZMS mortgage business is actively providing development, bridging and mezzanine finance to property developers throughout Auckland and is capable of supporting the largest transactions in the region.

For more information and understanding on the Cap Rate –http://www.propertymetrics.com/blog/2013/06/03/cap-rate/

www.nzms.com

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