16 MAR 2018
Throughout February, RICS hosted a series of panel discussions to understand the outlook for commercial property markets in 2018. Although participants in these discussions generally held a positive outlook, there were some indications that we are entering the later stages of this most recent property cycle.
The seminars were held in conjunction with Property Council New Zealand (PCNZ) and took place in Auckland, Wellington and Christchurch to focused on these three key commercial property markets.
Participants took a holistic view of each market, contextualizing them within New Zealand, Asia Pacific and more broadly within the global property cycle.
Conditions in these three markets are diverse. Office space in the Auckland CBD offers an example of this, as prime properties are viewed as being in the more advanced stages of the current cycle. In an environment where yields in core areas have been compressed in recent years, there are some signs of speculative activity in more peripheral areas, particularly secondary industrial properties.
Higher interest rates in New Zealand, and tighter lending standards enacted by regulatory authorities, should help to dampen some of the frothier investment activity. Although this will be a headwind to commercial property more generally, low vacancy rates should provide a cushion to any downside risk for Auckland commercial property.
As panellists pointed out during our discussion in Auckland, the vast majority of investments that have been made will remain economically viable even in a cyclical downturn, and leverage ratios are much more subdued than in previous cycles.
Despite yield compression in recent years, Auckland office space still offers a premium over other core centres in developed Asia-Pacific markets such as Tokyo, Singapore and Hong Kong. As such, Auckland continues to attract strong demand from both domestic and international investors.
Additionally, the pullback in mainland Chinese demand since capital controls were enacted in 2017 (particularly for development sites) has been replaced by interest from other Asian and North American institutional investors.
A city that has begun to attract more international interest towards the end of 2017 has been Wellington. Although the change in government has proven to be supportive of fundamentals, the Q4 respondents to the RICS-PCNZ Global Commercial Property Monitor indicated that some demand may have shifted from Auckland to Wellington.
A similar dynamic was seen in Australia and China: demand shifting to less saturated, secondary markets. The outlook warrants some caution, however, as rent increases are beginning to weigh on government tenants and substantial new stock is set to hit the market.
Conditions in Christchurch remain more subdued. Although data indicates that vacancy rates have come down in 2017 and population growth has stabilised, there still does not appear to be a significant rebound in economic activity outside of the construction sector. Additionally, insurance costs remain a major burden – particularly for smaller investors that don’t have a broad enough capital base to diversify the geography of their portfolios.
This issue was discussed in detail by panellists, including Rob Hall FRICS, the CEO of Development Christchurch Limited. Rob has recently editorialised his views for RICS, where he stresses the need for Christchurch to diversify commercial activity and put more emphasis on attracting international investors. Should the city be successful in offering “confidence, clarity and certainty” to investors it could still represent a fruitful investment opportunity.
The seminars took place in Sydney, Melbourne, Perth and Brisbane and as such focussed on these key commercial property markets.
Participants took a holistic view of each market, contextualizing them within Australia, Asia Pacific and more broadly within the global property cycle.
Conditions in these three markets are diverse. Prime office space in the Sydney CBD is viewed as being in the more advanced stages of the current cycle. In an environment where yields in core areas have been compressed in recent years, there are some signs that investment is migrating to more peripheral areas.
Panellists in Sydney noted that investment in these assets have been made in an economically viable manner that should be able to withstand any downside risk. Additionally, the entrance of Amazon into the Australian market has provided the underlying occupier demand to support investment in industrial assets.
Concerns over the potential effects of higher interest rates on Australian commercial property as the Reserve Bank moves to normalise interest rates were discussed, despite the outlook for rates in Australia being more subdued than in other countries.
However, the current cycle has been characterized by a period of deleveraging by Australian corporations, while metrics that often signal the onset of credit bubbles such as cross-border lending have been more stable than during prior cycles. This, as well as measures enacted by the Australian Prudential Regulation Authority mean that commercial property is much better positioned to withstand higher rates than in previous cycles.
Despite yield compression in recent years, Sydney office space still offers premium over other core centres in developed Asia-Pacific markets such as Tokyo, Singapore and Hong Kong. As such, Sydney continues to attract strong demand from both domestic and international investors. Additionally, the pullback in mainland Chinese demand since capital controls were enacted in 2017 (particularly for development sites) has been replaced by interest from other Asian and North American institutional investors.
One of the focusses of the panel discussions was the shift in both investor and occupier focus to cities outside of Sydney. This dynamic has become more acute as low vacancy rates have pushed rents up for occupiers, while capital value appreciation has taken some liquidity out of the investment market. Home price appreciation has also played a factor in this. Although Melbourne has received the bulk of attention, characterized by the relocation of David Jones from Sydney to Melbourne, panellists also cited Brisbane and to a lesser extent Adelaide being potential destinations.
Perth presents an interesting case, the market having received more attention in recent quarters amidst what appears to be the green shoots of a recovery.
After years of economic contraction and falling rents, data indicates that employment has begun to recovery. However, some panellists still urged caution, warning that the market might have gotten ahead of itself and fundamentals, such as vacancy rates, remain inconsistent with an overly bullish outlook.
Additionally, Perth’s economy remains leveraged to commodities and as such is more vulnerable to exogenous shocks, and the increase in debt taken on by the government in Western Australia will limit its capacity to undertake infrastructure projects.
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