Top Ten Predictions 2016

Top Ten Predictions 2016

In our 2016 predictions for New Zealand’s property market we discuss views on market demand, politics, planning, emerging investor groups, how the office, retail and industrial sectors will fair and our opinions on the ever popular residential, hotel and agribusiness and rural sectors.

1. Investment demand increases
Post-GFC global economic and financial management by Reserve Bank governors has driven down cash and bond yields, propelling property to the forefront of decision making for ‘yield hungry’ investors.
The low inflation, low interest rate environment with buoyant business activity has produced a ‘snowball effect’ on value growth that has picked up speed and will not slow down in 2016.

Comment by Gareth Fraser, Director, Investment Sales:
Demand for commercial investments and add-value opportunities continues to accelerate across Auckland. We are seeing unprecedented yields being achieved for investment grade properties in the commercial, industrial and retail sectors.

Our auction clearance rate at 73% is at its highest level ever. Commercial investors continue to compete for properties and chase yield. This trend will only continue for 2016 given historically low interest rates.

2. Politics and planning distract markets and development in Auckland

Politics and property will be reluctant bedfellows in 2016. Political ‘hot potatoes’ in the New Year will include: Resource Management Act (RMA) reforms, better utilisation of public land, foreign ownership rules, infrastructure provision and further privatisation of state assets.

Comment by Alan McMahon, National Director, Research and Consultancy:

Auckland Council elections, providing a new mayor and a new council in 2016, will coincide with decision-making on the Proposed Auckland Unitary Plan.
This may hinder the appropriate release of cost effective residential and business land for much needed property development activity.

3. Iwi to the fore

Current asset-value growth will encourage greater involvement in the commercial property sector in 2016 from iwi. This includes well known tribes such as Ngai Tahu, Ngati Whatua Orakei and Tainui along with others from the 135 named iwi in New Zealand.

Comment by Alan McMahon, National Director, Research and Consultancy:

Commercial property investment for many iwi gathered momentum following Treaty of Waitangi settlements due to its ability to provide community involvement, long-term returns, portfolio diversification and inter-generational benefits.
Ngai Tahu Property’s opening of an Auckland office and Ngati Whatua’s purchase of the Aecom building illustrate these increased levels of activity in the making.

4. Industrial’s strong run continues

Our global survey of yield rates is an indication of the strong demand and competitive bidding for industrial property throughout New Zealand. The industrial sector finished 2015 in the strongest shape it has been in for decades.
Industrial was the first sector to emerge from the recovery after the global financial crisis - recently passing its last cyclical peak across many investment indicators. With vacancy rates at record lows in Auckland, Hamilton, Wellington and Christchurch, tenants will have to adapt to new rental levels in 2016, but better business conditions will assist.
Markets experiencing a greater level of building activity will help temper the rent rises. Robust property fundamentals will boost investor confidence in the sector - a driving factor for even more capital value increases in 2016.

Comment by Greg Goldfinch, National Director, Industrial Sales & Leasing, Auckland:

Auckland’s industrial market will continue its buoyancy, underpinned by the critical lack of investment grade stock and an abundant supply of capital looking to be placed into the market.

A similar supply crisis of quality industrial facilities available for occupiers (both for sale and lease) will be reflected by further record low vacancy rates. Strong commercial property market and economic fundamentals mean these industrial users will continue to require more space but availability is limited.

As a result we will also begin to see industrial rental rates rise in 2016.
Comment by Sam Staite, Director, Industrial Sales & Leasing, Christchurch:

The vast tracks of industrial land which have been sold over the past five years in Canterbury are filling up with a high number of new warehouses either under-construction or nearing completion.

Attractive interest rates and the loosening of banking requirements have seen owner occupiers as one of the most prevalent purchasers and developers within the industrial sector. The relocation of these parties is freeing up existing premises with vacancy levels across the city increasing quickly.

After large rental increases in recent times we anticipate occupancy costs to reduce through 2016 as landlords compete strongly for the tenants in the market.

Industrial investment yields continue to strengthen to record levels, and the large capital pool is unlikely to fill what limited quality stock is available so we anticipate prices to firm even further.

5. Demand to continue for retail assets, but buyers selective

Remarkably, the industrial sector’s performance will be surpassed by the retail sector in 2016. A strong finish to 2015 will position the sector at the forefront in 2016. (Retail typically accounts for around 20% of national sales transaction activity - compared to 50% in the industrial sector).

Large scale retail asset sales in the North Island - originally brought to market in 2015 - will demonstrate the sector’s dominance. The complexity involved in these transactions slowed down the process, which were originally thought to sell within the 2015 year.

Investors will treat investment opportunities on a case by case basis in 2016 - no matter the offering.
Retailers’ prosperity in the short to medium term will be driven by positive demographic and socio-economic factors that will boost the number of people buying and the amount they are spending at their shops. Not all retailer will be positioned well in this regard, but retailers enjoying a positive mix of these factors will flourish. We expect that 2016 will still provide diverging commentary surrounding the suburbs versus the CBD, strip versus mall and offline versus online retailing. The government’s latest changes to GST for online retail will bring New Zealand in line with global best practice.

Comment by Leroy Wolland, Director, Retail:
Retail is benefiting from record high net immigration, strong labour conditions and a rising housing market all within a low interest rate environment.

The demand for retail space within Auckland’s CBD, suburbs and shopping centres illustrate a sector on fire. Vacancy levels are at record lows across Auckland and several new retail developments in the Auckland market have opened fully leased.

In Christchurch, the rebuild is well under way, seeing record activity levels. Wellington is back in favour with rising interest levels from international retailers off the back of commitment from David Jones and Seed Heritage with several other international brands knocking on the door.

The buoyancy in the investment sector for quality retail assets remains strong. Two recent large scale retail asset transactions in New Zealand were the sale of the 25,500sqm large format zone of the Westgate Town Centre and the sale of 19 Countdown Supermarkets, which sold at strong yields illustrating the demand for quality retail assets.
We see this demand continuing through 2016.

6. Office sector’s time to shine

The office sector will break new ground in 2016. Current growth potential for this sector is difficult to compare in New Zealand’s history.

The pent-up demand for prime office space has driven vacancy rates to record lows and the pipeline of developments will only moderate demand slightly. The most notable example of this will be in Auckland. Wellington’s transition through government procurement and seismic ratings is now all but complete, paving the way for a new look 2016. Christchurch is the exception, but year-by-year the likely magnitude of oversupply diminishes, rekindling the discussion about true market rental rates.

Comment by Rob Bird, National Director, Office Leasing

A major new Auckland CBD tower will get underway in 2016.

Significant office developments will also commence in all of Auckland’s key CBD and fringe markets including Wynyard Quarter, Victoria Quarter, Parnell, Newmarket as well as Highbrook, Westgate, Auckland Airport and North Shore.

Tenants and landlords alike will place much stronger focus on access and adjacency to public transport in their selection of office space.

7. Residential focus diverts from Auckland

There was a net increase of around 165 immigrants to New Zealand’s population per day in 2015, which has significant ramifications on housing availability. Prices exploded and triggered financial stability responses from the Reserve Bank, and government stepped in with new vendor requirements.

Auckland investors will look further afield in 2016, reducing price growth in Auckland while increasing the demand for properties in some of the other 15 regions of New Zealand. This is a feature already occurring in some regions.

Comment by Chris Dibble, Director, Research and Consultancy:

The compound annual growth rate of residential dwellings has been 11.2% p.a. over the past five years in Auckland, compared to 7.4% over the last 20 years. Recent legislative changes and new regulations in China will slow the rate of Auckland dwelling price growth to long-term averages.

Investors will look further afield, creating an “Auckland investor effect” in neighbouring regions that will see regional dwelling price growth at rates not seen since 2006.

8. Auckland CBD apartment building to accelerate

Structural inadequacy in Auckland’s housing supply will escalate over 2016. Construction is at a historically strong rate in the CBD, but not nearly enough to house another 30,000 anticipated residents over the next few decades.

Comment by Pete Evans, National Director, Residential Project Marketing:

In Auckland, new dwellings are still under supplied and building costs continue to go up due to increased demand.

Apartments are now seen as an affordable alternative in a housing market that experienced one of the fastest and most sustained periods of price growth in its history.

The market is placing greater focus on density to alleviate demand and price pressures, which will increase the attractiveness of apartments. While residential auction clearance rates declined significantly in the fourth quarter of 2015, apartment sales increased. All of these changes will see the apartment market continue to grow throughout 2016.

9. Long-term demand for rural property

Lower dairy payouts in the short term will not be enough to cast a shadow over demand for property in the rural and agribusiness sector in 2016. Demand for property in the beef and lamb industry will rise along with prices at the farm gate.

Forestry and horticultural sectors will enjoy their time to bask in drier, more accommodating weather conditions. Issues around foreign ownership rights, health and safety, the environment, climate and irrigation won’t go away.

Benefits will become clearer for the industry from the Trans-Pacific Partnership (TPP) - the largest regional trade agreement in history.

Comment by Shane O’Brien, National Director, Real Estate, Rural & Agribusiness:

Property values have not shown any value reduction in most established areas due to a lower dairy pay-out with sellers resilient to lower expectations amid the strong medium to long-term outlook for the sector. Dry weather conditions across much of New Zealand may impact market sentiment in early 2016, however many of the areas experiencing the harshest conditions are the most irrigated.
Strong local buyer demand will continue for well-established areas such as Canterbury, Hawke's Bay and Waikato. Some less prominent areas will feature more in 2016 with an increase in listings. Lower interest rates and optimism in farming will encourage buyers who are able to expand operations in dairy, arable and sheep & beef sectors.
International buyer enquiry from Europe and America will continue as well as strengthening enquiry from Asia. The preference for ‘opportunities of scale’ within well-established areas will remain.

10. Hotels continue to boom

New highs in occupancy levels, record growth in room rates and increases in revenue per available room (RevPAR) are key features of the hotel sector for 2016.

Increasing demand and constrained supply will improve bottom-line profitability and compress investment yields. The rise in sales and ‘repricing’ of hotel assets that emerged in 2015 will lead to a number of investors testing values in the open market in 2016.

Comment by Dean Humphries, National Director, Hotels:

Prices achieved for hotels that have sold in recent months confirms there is a ‘recalibration of pricing’ occurring in the marketplace. Vendors are taking advantage of unprecedented market conditions to test their assets’ values in the open market

We are witnessing the first stages of the next transaction cycle with over $290m in sales recorded by November 2015, up a staggering 500% over the same period in 2014, and just shy of the previous peak in 2010, which saw nearly $300 million of transaction activity.

New Zealand is currently enjoying a major tourism boom, with more than three million international visitors visiting our shores for the first time in a one year period.

This is a 7.8% increase on the previous twelve months. RevPAR growth (Revenue per Available Room) in many of New Zealand’s major tourism centres is now reaching 10% to 15% per annum, well above many of Australia’s leading cities like Melbourne and Sydney.

ENDS

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