Category Archives: Pro Commercial property

Danny Blair – Colliers Hawke’s Bay

Talk of town heralds redevelopment of Napier CBD

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The talk of the town locally is the recent Colliers sale of two iconic office buildings in the heart of central Napier, Dalton and Vautier Houses, heralding an era of extensive redevelopment in Napier CBD and presenting exciting leasing opportunities within the city.

The landmark properties, recognised as the largest office block in the Hawke’s Bay region, were acquired by Wallace Development Company, a move that promises to transform the cityscape and invigorate the commercial landscape.

Boasting a 100 per cent NBS rating, the buildings will feature flexible floorspaces that cater to a range of needs. Wallace Developments will be enclosing balconies to create more floor space, the total net lettable office space will increase from 7,269m² to 8,400m² providing ample room for businesses to thrive.

Other recent sales concluded by Colliers Hawke’s Bay include the vacant possession sale of Simply Squeezed Factory, coolstore and bottling plant situated in Bayview. Simply Squeezed owned by Frucor Suntory decided that the plant at Bay View would be closed and sold after operating for more than 30 years.

A significant industrial asset situated at 39 Edmundson Street, Onekawa, with a lease to Move Logistics has sold for the second time within two years, again reiterating the resilience of the Hawke’s Bay industrial market and lack of available land in Onekawa.

A brand-new NPD self- service fuel station on Heretaunga Street Hastings sold only one week after the doors opened at a yield of 5.82%, not far from where Colliers would have expected this to sell this asset at the peak of the market now 18-24 months ago.

This property had a brand new 15-year lease with annual 2% increases. The sale price shows there is still strong local demand for quality bottom drawn investments with solid tenant covenants.

Stabilisation in interest rate forecasts indicates turn in market activity ahead

The influence of interest rate rises on investor sentiment and sales activity within the commercial and industrial property sector is inescapable, but so too is the potential for growth given the forecasts of peak interest rate hikes this cycle.

Between April 2021 and March 2022, historically low interest rates, with the Official Cash Rate (OCR) ranging from 0.25% to 1.0%, combined with accommodative access to finance, resulted in heightened competition for assets, driving the total value of commercial and industrial property sales to $13.4 billion.

Over the subsequent 12 months, the OCR increased to 4.75% and remained on an upward trajectory. This saw investors adopting a more cautious approach, resulting in a significant slowing in activity, with the value of transactions falling to a provisional $5.8 billion*.

Transaction counts and annual sales values retreat from highs

When analysing sales by sector, industrial property was the strongest performer with 1,400 sales generating a total sales value of $2.84 billion, just under 50% of the commercial and industrial market’s annual figure.

Sales of retail properties comprised almost a quarter of the annual total by value at $1.3 billion. This was the highest share of total sales recorded by the sector since 2017. The total value of office sales at just under $893 million comprised 15.5% of the total, down from the sector’s 10-year average of 21.8%. This data highlights the ongoing confidence in the industrial sector’s demand, supply and income return drivers, greater focus on an office premises’ location and quality in a changed demand environment, and the retail sector’s longer term recalibration and transparency in performance metrics.

Trends mirrored across other asset classes

The reduction in commercial and industrial sales activity mirrors trends seen within the residential sector. Real Estate Institute of New Zealand (REINZ) data shows that in the 12 months to March 2022, the total value of residential sales nationally stood at $84.16 billion. By March 2023, the annual figure had retreated to $56.41 billion. Given the rise in the number of industry participants indicating a bottoming out in residential sales declines, this would also suggest that the end of declines in sales activity within the commercial and industrial sector is also imminent.

Outlook

Looking at the prospects for the remainder of 2023, it is likely that activity will increase from the levels witnessed in the first quarter. Over the last decade, first-quarter sales have comprised a smaller proportion of the annual total than the other quarters every year, with the exception of 2022.

Sales in the first three months of the year have generated an average of 16.5% of annual sales by value. As previously stated, the decline in sales activity has been driven by the rapid rise in interest rates. Investors have chosen to adopt a cautious approach given the uncertainty regarding the level at which interest rates would peak.

The stabilisation of interest rates and the expectation of future decreases are likely to underpin an increase in investor confidence and an upward trend in transactional activity.

*The lag in reporting of sales will result in total sales values being upwardly adjusted.

 

Top commercial predictions for 2023

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In the last Colliers monthly report of 2022 we provided provide some of our top predictions for the following year and below are the 12 that relate to commercial property on a national scale.

These are not our only projections on the large, complex and ever shifting dynamics of the property sector, so make sure to reach out to get the most relevant and up-to-date advice. Many of the predictions and observations in a Hawke’s Bay context also ring true, and I have covered off these below.

The economy –

1. The RBNZ and economists pick that the peak in the cash rate is getting closer to tackling inflation, but it is still a few months away. While still some opaqueness on timing remains, greater clarity in the ultimate cost of finance is emerging following the latest RBNZ guidance of the OCR peaking at 5.5% in 2023.

2. While challenges lie ahead, the economy will benefit from the boost in demand provided by an increase in the number of overseas tourists, students and workers, facilitated by the reopening of the border and from an easing in supply chain constraints.

Hawke’s Bay has been one of the better performing regions over the last couple of years thanks to our food production sectors, strong retail trade and plenty of local and central government infrastucture projects. We hope apple growers and other food producers aren’t impacted by poor harvest weather, getting high yield crops followed by good export market returns.

Industrial property

3. Record levels of consent issuance point towards some relief for occupiers searching for space, albeit that vacancy rates will remain low by historic standards.

4. Tight market conditions and an inflationary backdrop will see rental levels continue to rise at an elevated pace. Limits, though, will be tested by the ability of businesses to pass on costs to their customers.

5. Owner occupation will become increasingly attractive to businesses looking to insulate themselves from rising rental costs, which will underpin sales activity as investors adopt a more cautious approach given the increasing cost of debt. Industrial land is becoming scarce in Hawke’s Bay. The two major industrial zones of Irongate and Omahu are close to capacity and new land development areas will become more difficult to release due to new National Policy Standards to protect fertile growing land.

Office

6. ESG considerations will become increasingly influential when decisions on office occupation are made. Both governmental, led by government mandates, and corporate occupiers, who are setting their own targets, are looking to limit their environmental impact as we transition to a net carbon zero future.

7. Businesses are likely to provide less remote working flexibility for new and existing employees, but the war for talent will continue. This will add further impetus to leasing demand for well-located, high-grade office space designed for maximum staff engagement, collaboration, innovation and socialisation.

8. While prime grade assets will remain the favoured investment option, a broadening of investor interest will arise as greater clarity on the cost of debt emerges. This will allow a more accurate assessment of the fair value of individual assets based upon the risks and opportunities which they possess. As a result, value add opportunities will become increasingly attractive.

There is no A and little B Grade quality commercial office space across Hastings, Napier and Havelock North. This is a significant issue as Hawke’s Bay continues to be a popular place to establish a business while many local businesses have also grown, requiring more office space. The impact on this will also be felt by tenants as record square metre rates are set. 101 East in Hastings is now at 100% occupancy with Colliers brokering three major lease deals with Westpac, Ask Your Team and Hawke’s Bay Business Hub.

Retail

9. The trend towards mixing experience with product will accelerate as property owners look to broaden the appeal of centres and attract a wider range of consumers to visit more often and stay for longer.

10. Retailers will continue to face operational challenges next year likely resulting in fewer expansion plans and strong discussions during lease negotiations with new and existing landlords. Retail located in prime catchments with a strong omni-channel offering and providing an experience rich in-store offering will continue to remain popular amongst customers, and likely the most profitable.

11. Off-market activity will rise as buyers and sellers negotiate on new benchmark values being formed as a result of new transactions and valuation evidence.

Hastings has undergone a significant makeover with a clear mergence of a hospitality precinct, east of the railway lines and a retail precinct, west of the railway lines. It has attracted some key new businesses into the city, many of which have been brokered by Colliers such as Chemist Warehouse, & Australian retailer Nick Scali. Napier has seen recent retail movements with BNZ relocating as well as Number One Shoe Warehouse both securing new premises on Hastings Street.

The Halfway Mark: Asset Class Market Update

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The July edition of the Colliers monthly property research report reflects the halfway mark for 2022 and presents a timely opportunity for us to provide an update on market conditions across multiple asset classes both of what is being experienced nationally but also some of the local activity that has taken place.

Retail

The retail sector has had its fair share of challenges over the last couple of years, but the opening of closed borders at the end of the month provides some more positive expectations for retailers ahead. The low unemployment rate has been a major tailwind for the sector, but the rising cost of living, debt cost increases and a slowing residential sector provide headwinds that will continue to impact retailing over the short-term.

It is worth noting that despite low consumer confidence surveys, there are bright spots. From an online spending perspective, Q1 2022 was a record, with the latest NZPost report showing an exceptionally strong quarterly result with $2.2 billion of spending occurring, a rise of 86% from Q1 2020 (a record 77% was with NZ-based businesses).

This highlights that people are still willing to spend while property purchasing in the retail sector and leasing activity remains buoyant with Chemist Warehouse leasing new space at 300 St Aubyn Street Hastings, and No 1 Shoes taking on a larger premises at the ex Rebel Sport at 246 Hastings Street Napier. Curtain Studio Hastings recently sold off market at a yield of 5.5%.

Office

The debate surrounding back to office work, remote working and hybrid working continues to take place. While trends offshore provide some insights, caution is advised on their use outside of the origin location.

There remains a desire for good quality office space has risen and this will add pressure to what is ultimately a limited resource.

New Zealand’s adoption of environmental standards, while improving over the years, is arguably still well behind other countries’ approaches. With an ever-increasing focus on the environment and a lack of standardised accreditation in the sector, there is likely to be a number of ongoing challenges.

Quality offices that have been established over the last six months include the 2nd stage of retail and commercial office space at Joll Road Havelock North, which is the new home for Colliers Hawke’s Bay as well as Forsyth Barr and RTA studio Architects. 101 Queen Street East is getting close to completion in Hastings, with Westpac now open and Ask Your Team relocating from Havelock North to a new premises within this development leasing over 800m. of new office. Napier office vacancies remain tight with limited available stock and no A grade space available.

Industrial

Rental growth in the industrial sector will be one of the standout trends for 2022 and 2023, as limited supply and ongoing demand continues to impact the sector. Projections of 3% to 4% p.a. prime rental growth rates are likely to be tested, and while limited evidence is available at this stage, anecdotal evidence suggests higher percentage rates should be anticipated, especially for the most sought-after spots. On the horizon is more industrial floor space, which may assist alleviate some occupancy constraints, but not all pressures.

Irongate, which was planned to take about 20 years to be at capacity, has quickly got close to being fully occupied or developed, with Sun Fruit commencing construction of a new coolstore and another large player in the apple industry looking to construct a new coolstore within Irongate also. T&G $100M packhouse in Whakatu is well under way which is believed to be the ‘biggest in the southern hemisphere. The recent sale of 51 Edmundson Street Onekawa leased to move logistics sold at deadline, at a yield of 4.7%, or $5.25M with multiple parties all very close in price.

Government proposes new commercial lease rent abatement clause

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What has been proposed? 

The government proposed to amend the Property Law Act 2007 by inserting a clause into commercial leases, when introducing the Covid-19 Response (Management Measures) Legislation Bill.

The proposal notes that when there is an epidemic and the tenant is unable to access all, or part, of their leased premises due to health and safety reasons, that the landlord and tenant should negotiate for a ‘fair proportion’ of an abatement in rent and outgoings. The proposal indicates that this could take place from the 28th of September (inviting submissions on the date) and be enforced for the period of the epidemic, which in this case is up to the 19th of December 2021, which could potentially be extended.

Didn’t this happen in 2020?

The government looked to introduce a similar, albeit different, amendment in June 2020. It did not proceed, most seemingly a result of the coalition government at the time, with Winston Peters calling it “poorly targeted policy”. Also, many, but not all, landlords and tenants had or were already in the midst of negotiation given it was finally proposed in June after the country went into its first Alert Level 4 lockdown in March 2020.

So, what are some of the differences this time? 

Apart from there being no coalition government this time, other differences include:

  • there has been a substantial time period put in place irrespective of Alert Levels
  • there isn’t a restriction on business size, previously it was 20 or fewer full-time staff at the leased premises
  • the government is seemingly leaving it up to the landlord and tenant to agree on what is ‘fair proportion’
  • suggested that if ‘fair proportion’ is not determinable, parties seek mediation or arbitration
  • parties could agree that the clause does not apply
  • would only apply to leases which do not already provide for adjusted rent payment terms during an epidemic emergency.

Was there guidance on what ‘fair proportion’ was previously? 

Yes, there were some guidelines to assist with what ‘fair’ might look like, such as taking into consideration the levels of tenant income lost during the period the company could not trade fully, any landlord mortgage obligations, the previous years’ profitability of both parties, any financial assistance provided, the ability of both parties to survive financially and any other relevant factors. The government also provided $40 million for accessing dispute resolution services, which has now ended.

What about the ADLS lease clause 27.5?

Given many agreements utilise an ADLS lease, which has the 27.5 ‘no access clause’, discussion is arising that this could be considered a rent adjustment clause anyway. Further, there will already be many current agreements in place that will potentially supersede this proposal, which comes 1.5 years after Covid-19 was officially called a global pandemic by the World Health Organisation.

So, what now? 

The proposal is still to go to the select committee, and there is a lot of lobbying underway given the implications that changing existing legal contracts represents, so some changes may still occur. It would be fair to say that there are seemingly a few gaps, leaving many potentially feeling that the proposal is not of real assistance for landlords or tenants. With strict lockdowns (fingers crossed) already behind us, many will have negotiated a way forward a long time ago, so this will be of less relevance. No guidance on what ‘fair proportion’ represents doesn’t really help, especially those in a dispute already. Perhaps the best way forward from this is to focus on how New Zealand emerges safely and effectively from current Covid-19 restrictions, so that the clause doesn’t need to be enacted.

Record making start to 2021 in commercial property activity – Danny Blair – Colliers HB

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Colliers Hawke’s Bay has kicked off 2021 with the largest January and February since inception in 2004.

The economic rebound experienced in the third and fourth quarters of 2020 post the lockdowns led to a rise in a number of local economic indicators, as a broad range of sectors reignited in an attempt to make up for the lost periods of activity. The rebound across many measures has been strong, particularly retail spending, residential and commercial real estate and export conditions.

This has buoyed local conditions, providing cautious confidence in occupier and investor decision-making. There are a number of underlying economic benefits the Hawke’s Bay enjoys including a growing population and employment opportunities which support commercial real estate activity. Investors are conscious that a rebound and resumption in more normal market conditions are eventuating due to the forced short-term nature of market disruption. As a result, investors are turning their focus towards the solid market conditions leading up to COVID-19 and reviewing the fundamentals. Investors are postulating that the current uncertainty created by COVID-19 could be accommodated in many circumstances, especially if incorporating longer-term projections.

Office

Despite caution in the office sector due to the rise in remote working, an active development sector is forecast over the next five years. Supporting some of the optimism is the economic and business performance outlooks. One measure to keep an eye on is the recent changes in the number of filled jobs reported by StatsNZ. It is still early days, and overall growth rates are still below COVID-19 levels, but some trends that show office occupier demand returning are appearing.

Industrial

Strong leasing market fundamentals, which have seen vacancy rates holding at low levels and upward pressure on rentals, have underpinned the positive sentiment towards the industrial sector amongst investors. The results of the latest Colliers investor sentiment survey found that investor confidence across the country was a net positive 45% (optimists minus pessimists).

Retail

There have been some clear winners in the retail sector after a challenging 2020. Latest data released by StatsNZ indicated core retail card spending in December 2020 totalled $6.68 billion, an increase of $1.14 billion from the previous month and 4.8% higher than December 2019.Consumable and durables recorded the biggest spending increase as Kiwi’s spent up strongly in liquor, supermarket and grocery stores. A new milestone was also recorded with spending on food and beverage services surpassing the $1 billion mark for the first time on record. The nonfood and beverage large format retail sector have also benefited, with strong spending in the furniture, electrical and hardware category, with spending up 12% compared to December 2019.

Economy is performing better than forecast

Action taken by the government and Reserve bank to insulate, as far as possible, NZ business from the impact of COVID-19 and the relative success the country has had in dealing with the virus has seen the economy outperforming original forecasts. Treasury now expects New Zealand’s GDP to grow by an average rate of 4.2% across 2021 and 2022 outpacing Australia (forecast 3.6%) and the USA (forecast 3.5%). While unemployment rates are expected to increase, they are much lower than original expectations.

The unemployment rate is forecast to peak at 7.8% as opposed to earlier predictions of 9.8%, according to latest Treasury forecasts. Government policies including business tax refunds, small business cashflow loans, wage support and mortgage holidays successfully limited job losses and company failures. The Reserve Banks quantitative easing and reduction and stability in the OCR until March 2021 has improved market liquidity, kept interest rates low and boosted investment confidence.

Investor competition set to drive values higher

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Despite some uncertainty and short-term disruption to market conditions from COVID-19, low interest rates are fueling investment activity, especially for prime properties with strong covenants. The flight to quality and limited stock available to purchase is likely to elevate the level of competition amongst experienced investors driving values higher.

Overall Investor Market Conditions

The economic downturn created by the COVID-19 lockdowns and the introduction of border restrictions has created economic disruption that has reduced the current level of commercial market activity.

However, investors are conscious that a rebound and resumption in more normal market conditions could eventuate due to the forced short-term nature of the situation. As a result, investors are turning their focus towards the solid market conditions leading up to COVID-19 and reviewing the fundamentals. Although not as strong, investors are postulating that the current uncertainty created by COVID-19 could be accommodated in many circumstances, especially if incorporating longer-term projections.

While vacancy rates are expected to lift from 20-year record lows, the secondary sector is facing more challenging market conditions than in the prime sector, as occupiers and investors pursue quality premises.

Despite some uncertainty and understandable cautiousness, investors are spurred on by low interest rates, which will continue to remain low (and may reduce further) for an extended period under current forecasts.

The RBNZ continues to keep monetary policy settings accommodative and financial markets liquid, but there is an overall reluctance from major banks to write new business. This uncertainty has increased the demand for debt advisory services, which are proving beneficial. We are also noticing a greater number of non-bank lenders, high net worth privates, domestic and institutional funds entering the market, albeit at a higher cost of capital.

A recent Colliers International APAC research report noted that the yield spread over ten-year government bonds in New Zealand was amongst the highest in the APAC region. In addition, New Zealand’s approach to dealing with the virus has enhanced its international reputation as a safe haven which is likely to spur greater overseas interest in local assets. In the short-term, the ability of overseas investors to transact will be tempered by border restrictions in place, and likely for the remainder of 2020. A sharp lift in international activity is anticipated once restrictions are lifted, prior to this however, domestic players look likely to take the opportunity to fill the gap.

A lack of alternative options to generate returns will keep investment activity high, however, competition for a short supply of prime assets available to purchase will remain a challenge. This could lead to a return of fear of missing out for investors. If this eventuates, it is likely to push yields lower and capital values higher for quality stock with positive attributes.

Record sale takes place during lockdown

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We are now in the recovery mode of COVID-19, having been in full lockdown and then varying levels.

At Level 1 we are much closer back to the normal than many other countries across the globe.

There is certainly an air of the unknown going forward from an economic recovery, but Hawke’s Bay is well poised to recover at a faster rate than other regions. There’s significant residential, commercial and industrial building activity on construction books and we have also had several prominent sales.

The Colliers Hawke’s Bay team was busy during lockdown working on many leads and listings and it was a major highlight to announce at Level 2 that we had closed a history making transaction with the sale of The Tomoana Food Hub for $41m, at a yield of 6.23 percent.

It was a fantastic feeling to announce the record sale to the Hawke’s Bay business community, providing confidence that there are willing investors keen to invest in Hawke’s Bay.

The sale was to a new property syndicate established by Mitchell Mackersy Lawyers. The syndication scheme didn’t close until end of March and was over subscribed, which is another indicator of investor confidence in Hawke’s Bay.

Tomoana Food Hub also has some high profile multi-national tenants that are long established in Hawke’s Bay such as Tomoana Warehousing, Jamestrong Packaging and Fonterra.

During lockdown the Colliers International market research team based in Auckland launched a new investor and occupier sentiment survey which sheds some light on how landlords, tenants and investors have reacted to the impacts from COVID-19 and expectations for the future.

Approximately half of the respondents believe that conditions will stabilise within a year and 58 percent see the year ahead providing new opportunities and indicating that they would like to make their next acquisition within the year.

Enthusiasm amongst purchasers has clearly been bolstered due to a general belief that values will ease over the short term from the peaks apparent over the latter part of 2019. Approximately 80% of respondents are picking a decline in values, but some may be disappointed. Transactional evidence to date suggests that high quality properties with premier tenant covenants remain in demand with limited shifts in pricing.

Rent relief during lockdown has been a significant issue and is clearly illustrated by responses to the survey with 82% of landlords and 55% of occupiers confirming that rental assistance packages have been agreed. In April, 84% of occupiers reported paying of 50% or more.

It is likely that the May statistics will be similar with 67% of landlords and 76% of tenants expecting rental payments to be the same as they were in April.

The lockdown also enforced a massive change in working habits with a vast majority of office workers conducting business from home. Survey results show that the move has proved popular for employees.

Although working from home is likely to be an ongoing topic of discussion 75% of respondents to the occupier survey indicated that they would retain the same or increase their footprint over the next 12 months.

Further, the traditional office setting continues to offer many advantages. According to respondents, being able to collaborate with colleagues in person (34%), bumping into co-workers (13%) and the ability to have spontaneous meetings (12%) were rated as key benefits.

The industrial property sector is viewed by investors as being the most resilient in the current economic climate. While there will be some disruption in the short term due to the impact of COVID-19, history shows the resilience of the industrial sector in periods of uncertainty and market disruption.

At the heart of the industrial sector, goods-producing industries such as manufacturing and construction accounted for around one-fifth of New Zealand’s $300 billion economy in 2019, according to Statistics New Zealand. In addition services such as transport, warehousing and postal services, industries in growth pre-COVID-19, has been boosted significantly in recent months as people shift to online and ‘click and collect’ services more than ever before.

2020 shapes up as a stellar year

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This year is shaping up to be another stellar 12 months for commercial and industrial property in the Hawke’s Bay. Investor confidence remains high and market activity is strong on the back of an outstanding 2019.

Yields are likely to compress further on the back of record lows in 2019. The sale of the 19-unit Harvest Lodge Motel in Havelock North for 4.54 per cent last year was the sharpest yield in history for a Hawke’s Bay commercial property. While not all properties will attain such returns, we see yields in the 5 to 7 per cent range as representing the new norm, given the continuing low interest rate environment and strong investor appetite.

The Hawke’s Bay industrial sector is expected to continue its strong run in 2020, buoyed by the thriving horticulture sector. This trend is exemplified by the sale in 2019 of a 6.3ha industrial property at 22 Irongate Road, Hastings, which will be transformed into a $30 million new pipfruit facility. This was the largest industrial land transaction in the Hawke’s Bay last year.

Havelock North will continue to be a focus for growth, particularly in the office sector. Numerous investment advisory and management firms have established offices in Havelock North in recent years, putting the town in a position to become a regional financial hub in the future. The location is attractive due to its relatively affluent residential population and its proximity to key markets in Hastings and Napier. Strong horticulture and tourism sectors are also adding to growth.

The future of retail continues to be augmented by the tech sector, rather than disrupted. Tenants benefit from a wide range of apps to assist them with business, focusing on customers, staff and productivity benefits. Owners benefit from better understanding about property management and facilities management requirements. Investors get a better understanding and assessment of risk and potential future benchmarks.

Key to all of this is access to data and information. The advent of 5G in New Zealand will help transmit significant amounts of raw and visualised information at an immense pace. Connectivity will be a major game changer over the next few years.

To assist our clients in this space, Colliers International has been running Colliers Proptech Accelerator to create solutions, shape technologies and find opportunities.

Commercial property transaction volumes in Hawke’s Bay across all asset classes are likely to remain buoyant in 2020. Colliers had very strong years
in 2018 and 2019, resulting in our Hawke’s Bay office being named Small Commercial and Industrial Agency of the Year at the 2019 REINZ Awards. Commercial property investor confidence was 23 per cent net positive in Colliers International’s latest survey, which is line with national averages over the past two years.

Property investors predict positive investment conditions

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Commercial and industrial property investors see positive investment conditions over the next 12 months in Napier and Hastings, according to the latest Colliers International commercial property investor confidence survey.

A net positive (optimists minus pessimists) 25 percent of respondents expect investment conditions to improve over the next 12 months, which was up slightly from the previous 2Q 2019 survey.

The survey also revealed quite a significant shift up in the number of optimistic respondents.

Approximately 41 percent were optimistic in the 3Q 2019 survey, versus 30 percent in the Q2 2019 results. More respondents shifted out of the neutral category, one of the largest shifts recorded in the Colliers survey.

There are a few key features in the Hawke’s Bay sector that is driving the positive sentiment.

Interest rates at all-time lows, with an expectation of rates to fall further, is driving some of the sentiment.

Access to capital remains a key element to this, and discussions around higher margins from potential changes made by RBNZ on capital requirements for banks (announcement expected in November) will most likely benefit experienced investors who can show a positive track record. Banks remain competitive for quality opportunities.

Another driver of the sector in Hawke’s Bay market is the demand and supply balance. Opportunities to lease space have been reducing recently. Also, general market

conditions have meant owners have been able to benefit from rising rents.

In the office sector, we have seen rents climb steadily over the past year, especially for the highest quality properties. Prime rents typically average between $275 per sqm and $320 per sqm. Prime average yields range between 6.10% and 7.00%.

In the retail sector, prime retail rents have been broadly flat over the past year, but prime average yields continue to sharpen, now ranging between 5.60% and 6.50%, down around 60 basis points in 12 months.

Industrial market conditions carry a lot of favour with investors with rents edging up higher as well. Average prime yields in the industrial sector are heading sub-6% in some locations.

CGT debate over, a flying start to 2019 set to continue

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Now that the debate about the introduction of a comprehensive capital gains tax is out of the way, we expect confidence to build further in the commercial property sector over 2019.

Starting with such a strong base to grow from, with over $138 million in commercial property sold in 2018, up from $116m the previous year, we knew 2019 would be off to a flying start. But, CGT discussions did muddy the outlook despite positive deals concluding as was recently showcased with a notable sale at 96 Austin Street leased to FPG, a world-leading food display and retail solutions business based in Hawke’s Bay.

This is one of the largest industrial sales Hawke’s Bay has seen for many years with the leasehold and freehold sold for a total of $15.620m.

There are already a number of positive sales and leasing transactions under negotiation that will create further market confidence, especially with no additional capital gains tax requirements. Providing market confidence in Hawke’s Bay’s future activity is the great wave of economic positivity we are experiencing.

Data from Statistics New Zealand, ASB Bank and research entity Infometrics are all fairly consistent in their assessment of our region’s economic prosperity.

They all show a rise in Hawke’s Bay’s population, GDP, employment, the number of businesses, agricultural outputs, construction activity, household income and retail spending. Not only has the many positive indicators provided ongoing confidence, it has translated into higher property sales turnover and supported steady leasing activity in the region.

Significant investment forecast in both infrastructure and construction over the next few years will also assist deliver new growth opportunities.

Development in Irongate, Omahu Road and Whakatau are growing in popularity due to the opening of the expressway extension.

As such, we see Hawke’s Bay remaining as one of the most confident markets in New Zealand, with enquiry from all over New

Zealand setting record prices for quality property, and investment yields in the 5 to 7 percent range.

Hawke’s Bay remains a safe-haven for investors, with strong population growth and a booming regional economy. The latest quarterly Commercial Property Investor Confidence Survey, released in March showed a net positive 22 percent (optimists minus pessimists) of respondents expected investment conditions to get better over the next 12 months.

This was broadly in line with the last four quarter survey results. Napier/Hastings had a standout result with a net positive 24 percent – the highest on record since the survey began almost a decade ago.

Considering the survey was undertaken during the release of the Tax Working Group’s final Future of Tax report, it is easy to expect higher confidence in market activity now.

When we look at each property sector in more detail, we note that the office sector continues to show solid tenant demand and especially low vacancy rates in Napier and Havelock North.

To release some pressure more premium stock will come to the market in Hastings, with The Tribune redevelopment, One Havelock Road in the Village and The Hastings Hive offering shared office

spaces for tenants looking to accommodate 3-15 staff in flexible leasing solutions.

Retail property is also experiencing a boost due to ongoing growth in retail spending. Retail Electronic card transactions data from Statistics NZ show core retail spend aggregated to $55,487 million for the annual year to February, climbing 4.4 percent from the previous year. The industrial sector which is getting a boost from logistics, warehousing and manufacturing sectors means demand for space remains high. We continue to see tightening vacancy rates across the Bay, particularly Onekawa which is already at historically low vacancy levels. This supports property fundamentals in an already strong investment sector.

While activity is expected to increase, supported by positive market conditions, continually unlocking opportunities can be challenging. If you are unsure of your next leasing, purchasing or selling move, or would like some more information on latest market activity, please get in touch with me.