Auckland office owners will take a hit

About 10% or 250,000m2, of Auckland office space may be uneconomic to earthquake strengthen.

Colliers researcher Alan McMahon says owners of newer buildings would benefit as tenants decided to quit these properties as leases ended.

“Owners of older properties will be left with a headache, potentially having to spend considerable sums on strengthening and reinstatement, with nothing to show for any capital expenditure except the same tenants on the same terms as before.”

Difficulties in retaining tenants would be exacerbated by difficulties obtaining financing.

For owners of reasonable quality properties, soaring insurance premiums would be preferable to none at all.

Building insurance was usually a requirement of any lender whose loan is secured against property, Mr McMahon says.

Lack of insurance was potentially a breach of loan covenants.

Although these issues might be well understood in larger centres, in smaller towns where commercial development had been commercially marginal “it is self evident that the vast majority of stock will be old and a high proportion made of unreinforced masonry – brick and concrete.

“For these owners there is a long and winding road ahead.”

Mr McMahon says improving property returns and said the long term average return of around 10% might be reached next year and this would attract overseas buyers back to the market.

Office investments continued to lag in terms of returns but Mr McMahon forecast a 4.5% increase in prime rents next year as vacancy rates declined in the face of minimal developments in the pipeline.

The Wellington vacancy rate sat at 14.9%, although only a small portion is in top-grade buildings. Mr McMahon is forecasting rental growth of 2%, the first increase in several years.

On the retail front, Auckland top rentals have been stable while capital values are up 12.5% on a year ago. In Wellington, prime rentals on Lambton Quay have been steady while Cuba Mall has enjoyed a rise of 11.3%. Conversely, the Willis St precinct saw a decline in rentals of 9.1%.