Era of compressing rates lives on despite external signals

PRESS RELEASE

FOR IMMEDIATE RELEASE – Monday 22 May 2017

Era of compressing rates lives on despite external signals

- Buoyant Auckland market persists into 2017-

Yields are continuing to firm across the Auckland commercial property market bucking what was expected to be a reverse trend based on market sentiment, according to CBRE’s latest Marketview report.

As of March 2017, office yields compressed by 0.28%, currently sitting at 6.45% for prime and 7.18% for secondary. Industrial yields are down 0.76%, reaching record lows at 5.66% for Prime and 6.78% for Secondary and retail centre yields are down 0.19%.

It’s more of a mixed bag for rental growth according to the report, with office market growth being relatively weak but strong in industrial with the achievement of new rental benchmarks in a number of precincts.

The buoyant industrial market continues to be evident based on findings in the report with land values continuing to flourish due to the scarcity of available land for purchase in an environment of low vacancy and strong occupier demand signalling development opportunities. Mt Wellington and Penrose achieving the highest indicative land values at $550 m2 and $538 per m2 respectively while the highest growth rates were recorded in Wiri.

Commenting on the investment market Brent McGregor, Senior Managing Director for CBRE New Zealand says that given the tougher lending environment, there were clear pointers that the era of compressing yields was over. However, the weight of local and international equity capital remained sufficient to push yields lower in almost all submarkets we monitor. This came as a surprise to some.

“The disconnect between sentiment and the yield assessments by CBRE’s research team points to a market in flux. Conditions have become less supportive of some investor groups. At the same time, CBRE’s interactions with market participants indicate that there is still liquidity, and the pricing of less leveraged investors for either smaller ticket investments in growth markets or for larger trophy assets remains firm.”

Looking ahead, the report notes that New Zealand GDP growth rates for 2017 and 2018 indicate circa 3%pa or more — well above the developed world average. Capacity will remain an important factor constraining firms’ activity, boding well for occupier market absorption, rents and, by extension, the investment performance of property assets.

While the investment market remains active with new pricing benchmarks, Senior Director and Head of Research for CBRE New Zealand, Zoltan Moricz says there is still an expectation that tighter credit conditions will begin to bite.

“The reality is credit conditions have become more difficult and this will have dampening impacts on both the occupier and investment sides of the property market. And despite what we’ve seen in the first quarter of this year, if recent financial market trends prevail, we see less potential for further material firming this year.

“Tighter credit conditions mean we should also see greater focus on leasing incentives to fund the upfront costs of expansion/relocation and motivate businesses to use space more efficiently and adopt emerging workplace practices offering efficiency and flexibility.

According to Mr Moricz, perhaps the most important outcome is that “the credit constraints may also contribute to a softer landing at the end of this cycle as restraining the top of the cycle should limit the need for more significant corrections down the track.”

ENDS

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