Industrial and Commercial Market Commentary
There continues to be demand for industrial and commercial property at Tauranga, Mount Maunganui and surrounding areas.
The market for good improved properties was undersupplied for a number of years, with agents reporting strong demand for investment property from a range of purchasers. Demand was driven by a range of investors including owner-occupiers, retiring farmers, and in particular our market was impacted for several years by demand from corporate investors, particularly from Australia, although these buyers have now dried up.
Interest rates have recently varied reasonably quickly, firstly with an increase in rates implemented by the Reserve Bank in order to slow down a rapidly growing economy, followed by even more rapid decreases to reduce the impacts of the global economic crisis on our domestic economy. Rates have now risen from those lows and are charged largely according to the cost of sourcing the funds and the perceived lending risk.
Some commentators anticipate capitalisation rates will generally move in line with changes in interest rates, and while we see some relationship here, this is not always direct. Other factors also contribute to the range of returns achieved on sales of commercial and industrial properties.
The Official Cash Rate as set by the Reserve Bank is now at 2.5%, with bank deposit rates at very low levels and the Stock Market has performed erratically. This is likely to see continuing demand for good quality commercial property, particularly where there are strong lease covenants to good tenants in good locations. Investment buyers are effectively buying into the tenant’s business and will be closely considering the prospects of such businesses and their ability to weather the challenging economic times we continue to face.
In addition, we note the improved affordability of commercial and industrial property has seen a return of owner-occupiers to the market, with agents reporting interest from these parties. The current oversupplied market gives such purchasers plenty to choose from, particularly in terms of the smaller units.
Over the last two years or so, there has been a noticeable increase in the range of capitalisation rates achieved, in part reflecting the circumstances of the parties to the particular sales. Where vendors are under pressure to sell, they are needing to accept less, however there is demand for, and acceptance of, relatively low returns for good quality, high profile property in particular.
Rentals for commercial, retail, office and industrial premises have climbed rapidly over the last few years, reflecting the rapidly increasing land purchase costs and construction costs faced by developers. The economic downturn however has seen lower rates achieved on the relatively small number of new lettings.
The high levels of rental achieved for new developments are now unaffordable for a number of tenants as the economy has slowed, and we would anticipate further reduction in rentals achieved as the quantity of vacant space available for lease increases. At the same time, landlords are now offering various inducements such as contributions to fit-out and rent holidays in order to let their buildings. In some cases downward rental movements have been negotiated by existing tenants.
This change in the rental market is now being reflected in the market for vacant land with this most evident in the more peripheral locations initially, followed by the more central locations. There is little vacant land available for sale in the established areas, but we would now expect prices to be noticeably lower than those achieved at the market’s peak in these areas.