Wellington CBD leads capital’s property market revival

Growing confidence and activity levels in Wellington’s central business district are key factors in the continuing improvement in the capital’s commercial and industrial property market, according to a big gun in the city’s real estate market.

Bayleys Capital Commercial’s managing director Mark Hourigan says the city’s central business district is a big part of the Greater Wellington property story. 

“With close to 1.5 million square metres of office space, it’s bigger than Auckland’s CBD, which measures around 1.35 million square metres. It is also Wellington’s retail centre, because the city does not have the giant shopping malls that are a feature of the Auckland and Christchurch retail scene,” Mr Hourigan says.

“When the Wellington CBD is doing well, the rest of the commercial property market tends to follow. So it’s pleasing to observe that there’s a good buzz around the central city again.

“Although it’s not exactly boom times, and parts of the CBD market are still soft, things are definitely heading in the right direction.

“There’s an increasing level of development activity occurring right across the central city. Some of this is owners facing up to the commercial reality of having to seismically upgrade their premises to 100% percent of New Building Standard to have any chance of securing a strong tenant. 

“But there is also jockeying for position going on ahead of another wave of large lease expiries that will occur over the next few years. And the reality is that there is no prime office space of any significant size currently available in the CBD.”

Mr Hourigan says helping the situation considerably in a market where gross office leases prevail, is the reduction in insurance premiums by 20-30% from their peak following the Christchurch earthquakes. 

He says insurance premiums are now back to where they were before the big ‘shakes,’ with insurance companies and their underwriters once again competing strongly for business. 

“That makes a big difference to the bottom line for landlords, and is contributing to more development activity. Hopefully, it also reflects a recognition by the insurance sector that Wellington is far better prepared to cope with a major earthquake than any other city in New Zealand,” Mr Hourigan says.

The CBD office investment market is also strong, with a number of large-scale sales concluded so far this year. 

“Some of the bigger landlords we are dealing with are reporting unsolicited expressions of interest in their properties from both local and offshore investors.

“Part of this is due to a shortage of large offerings for sale in Auckland. However, we are also getting increasing investor comment about how competitive the Auckland market has become and that there are better capital growth prospects in the capital.”

There has also been an encouraging lift in confidence in the CBD retail sector. The latest annual retail vacancy survey undertaken by Bayleys Research in early August shows reducing vacancies and increasing leasing activity in the core CBD, Cuba and Courtenay precincts, although vacancies are still rising in the Willis precinct.

In the Lambton precinct, vacancies have more than halved in the last year and tenants are on the hunt for big spaces in strong locations. Countdown is refurbishing approximately 1000sq m at the entrance to Cable Car Lane at 284 Lambton Quay for a Metro store. It also has consent for a supermarket in the Courtenay Central Shopping Centre.

An announcement is also expected soon on a confirmed Golden Mile location for global fashion brand Topshop, and there has been plenty of talk around town about another fashion brand, Zara, wanting to set up shop there as well.

“Securing the required 1000 square metres of space, however, is dependent on other tenants moving on. The arrival of David Jones early next year will inject additional excitement and activity into the central city retail market and is likely to attract further global retail players,” Mr Hourigan says.

The market is also moving along nicely outside the CBD – with the Bayleys Research analysis noting that industrial property has been performing well for some time now and there has been a noticeable tightening of yields for investment offerings, while land and building prices for vacant buildings have also been increasing. 

The market report noted that owner-occupiers remain active in the current low interest rate environment, which means they can leverage up an acquisition for a similar or lesser cost to renting. They are being encouraged by banks’ willingness to lend up to 100% of a property’s purchase price to companies with strong balance sheets.

The industrial investment market has been given a boost by NZX-listed Argosy’s $59 million acquisition of five industrial properties in Lower Hutt at an initial passing yield of 8.2%. In a further vote of confidence in the industrial sector, an experienced Auckland private investor has also recently bought a 10 hectare site for $10 million plus a vacant industrial building for $6 million in Seaview.

 The underlying strength of the investment market is also reflected in the fact that we have sold 15 out of 16 properties put up for auction in Wellington under the hammer so far this year, encompassing offerings from all market sectors,” Mr Hourigan says. 

 “We are also receiving four or five tenders on most of our larger offerings. This indicates that now is a good time to be investing.” 

Neil Prentice writes for Bayleys Real Estate