Time (again) For Value Investing

In a post-pandemic world, where spiraling inflation is pushing up interest rates and people seem reluctant to give up their comfortable working-from-home lifestyle, can commercial property still be an investment worth pursuing?

“Absolutely,” says Alan Haydock, director of Bayleys’ Auckland City & Fringe team and Bayleys’ number one Commercial and Industrial agent in New Zealand for the agency’s 2021/2022 financial year. “Now is an opportune time to adopt a value investment approach and lock in future upside while the market is softer.”

Value investing, made famous by billionaire Warren Buffett, involves taking a long-term view of a desirable asset; waiting, and then buying when the market is underpricing it, says Haydock. A particularly good time for this type of investment strategy is when short-term uncertainty creates a temporary discount on asset prices.

“I recommend investing in commercial property you understand and believe in. Bayleys sells more Auckland office stock than any other agency, so we are well placed to provide valuable market insights during the due diligence process.”

In the future ‘new normal’, though, do companies really want to pay for a swanky downtown office? Can’t we all just continue working remotely from our kitchen tables? Not quite, if overseas trends are anything to go by, says Haydock.

“Companies may offer their workforce more flexibility now than they did prior to the COVID lockdowns, but many have also come to appreciate just how important the office really is in relation to their productivity, innovation ability, and company culture.”

Haydock has noticed that more and more businesses are choosing to upgrade to higher quality premises with modern interiors; a key aim being to entice staff back into the office. Location remains important, but proximity to amenities valued by staff (such as eateries, gyms, and public transport) now matters most. This shift is creating some uncertainty and movement in the Auckland market, he says.

“When market volatility and uncertainty are high, it’s important to factor in the risk margin that is appropriate for you and establish a plan B for your investment in case a tenant decides to leave unexpectedly. In the short term, we are operating in a market where tenants have plenty of choice – and increasingly high expectations.”

Office vacancy rates have risen across Auckland during the pandemic, making it important to consider the true replacement value of a tenant, Haydock says. While many companies are looking for an A grade building and are willing to pay a premium for it, the rental gap between top and lower-tier buildings is widening.

So, what to do if you own an older office building and are worried about vacancy? “Fortunately, this situation has created an opportunity for value-add investors to upgrade well located, but tired office assets to a level where they meet the new Environmental, Social and Governance (ESG) requirements that companies are increasingly being expected to measure themselves on. Then capitalise on the A-grade rental margin. Solid Green Star and Nabers energy ratings will become an important differentiator for companies to attract staff and customers, and thus consequently for property owners,” says Haydock

“We are also likely to see more Auckland CBD office properties being redeveloped into luxury apartments – a trend that is on the rise across the US, where many prestigious city centres were transformed into virtual ghost towns during the pandemic. Downtown Auckland didn’t fare much better, yet perhaps should be called an early adopter having already embraced this high-end trend with the Pacifica Tower and International apartment complexes. Other notable projects in the pipeline are the Seascape at Federal St and 51 Albert St, which are under development and in combination with new hotel developments may well inject further new life into our sluggish city centre.”

With the exception of value-add and conversions, Haydock doesn’t see much scope for office rental growth in the short term. “However, when the next economic cycle commences, we expect to see good medium to long-term gains. The rental market is likely near the bottom now and properties with good fundamentals should recover when the economy picks up again. This market is made for value investors, with patience and a long-term hold strategy. “Be greedy when others are fearful, as Warren Buffett so aptly puts it.”

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