Commercial and industrial property market marches on

There has been another strong first-half year performance from the commercial property sector with the low interest rate environment, a rebound in the Wellington market and a pick-up in the provinces all contributing, according to Bayleys’ national director commercial real estate, John Church.

In a mid-year review commentary in Bayleys’ Total Property magazine which will be released on July 10, Mr Church says the commercial and industrial property market has continued to march along at a brisk pace in the first half of this year.  

“As the largest commercial agency in the country, Bayleys’ sales numbers provide a good barometer of how the market is performing,” he says.

“Volumes for the first six months of 2015 are tracking at a similar level to last year and this stabilisation of the market is a positive thing, as another big jump in activity was unlikely to be sustainable.”

This time last year, few commentators were predicting a fall in mortgage interest rates, or that already firm yields would be squeezed even further, claims Mr Church.

“Our most recent Total Property auction results suggest yields are still falling, with two retail properties – a well-located offering in Remuera, and a small dairy in a retail strip in Mt Albert – selling at sub-5% yields,” he says.  

“Median Auckland industrial yields are now at their lowest point since Bayleys’ Research began tracking them in 1988 and it would be a brave pundit who would bet against some further tightening of yields particularly if, as is now being widely predicted, the official cash rate is cut again.”

The low interest rate environment continues to be the key factor stimulating commercial property activity. 

“With rates likely to stay low – or go lower – for even longer, that big market driver is unlikely to change any time soon,” Mr Church says.

The first half of this year has confirmed that the recovery in the Wellington market in the latter part of 2014 was no flash in the pan. 

“Leasing and sales activity levels have continued to gather momentum this year on the back of what appears to be a sustainable recovery in the region’s economy, and increased business activity and investment,” Mr Church says. 

“Asian investors are once again showing interest in the capital city, while investors from other parts of New Zealand are also being attracted because yields have yet to undergo the sort of compression that is evident in Auckland and the market is at an earlier stage in the recovery cycle.”

Investor confidence is reflected in the clearance rate in Bayleys’ Wellington auction rooms –where 11 out of 12 properties put up for sale this year have sold under the hammer. There has also been a noticeable increase in tender and private treaty sales between $2--5 million. 

As investors cast their eyes further afield in search of good quality offerings, provincial vendors have achieved “excellent results” at recent Total Property auctions.  

“In our first auction for the year, four retail units in a new convenience centre on the main road into Rotorua sold under the hammer to buyers from Auckland, Hamilton and Matamata at yields of between 5.95% and 6.7%,” says Mr Church. 

“At the same auction, a Wallace Development Company new building on the main street of Dargaville, with a nine-year lease to Rabobank, sold at a 6.6% yield to a Northland buyer. 

“This followed the sale at an identical yield of another new building, also built by Wallace Developments, in Wanganui and with a nine-year lease to the NZ Automobile Association, which sold to a phone bidder from Christchurch for $970,000.”

Bayleys’ New Plymouth office recently sold a substantial Carters building supplies outlet on the outskirts of the city for $6.25 million at a 7.7% yield. 

“Not so long ago, a capitalisation rate well north of 8% would have been expected for a provincial property of this size,” says Mr Church. 

“These sales are indicative of a large amount of capital nationally chasing a limited supply of good property and are evidence that well-built, well-tenanted commercial property is a very saleable commodity in the current market.”  

With mortgage interest rates likely to go even lower, Bayleys expects sales activity to continue at current levels in the second half of the year. 

“However, it is doubtful whether we will see the same number of ‘big ticket’ sales that were a feature of the latter part of last year,” Mr Church cautions.

“Not because of any lack of demand – there’s still plenty of that, particularly from offshore – but because the supply well has largely been drained.” 

With the launch of Total Property on July 10, Bayleys will bring a further 84 properties from around the country to the market.

Neil Prentice writes for Bayleys Real Estate