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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.

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.

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.

Momentum in commercial sector set to continue

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All indicators are pointing towards the market building on the momentum created over the last two years. After a strong finish to 2018 with over $138M commercial property sold by Colliers Hawke’s Bay, a substantial pick up from $116M the previous year, and over 88 leases concluded, generating over $4.4M of revenue for Hawke’s Bay Landlords.

Already 2019 has started off with huge investor demand with a continued tenant enquiry across the board with new developments underway and many in the pipeline. The market has undergone tremendous growth in the last two years which we certainly expect to grow.

Data from Statistic New Zealand shows a rise in Hawke’s Bay’s population, GDP, employment, the number of businesses, agricultural outputs, construction activity, household income and retail spending all of which has been filtering through to building confidence. Not only has the many positive indicators translated into high sales turnover, but it has supported leasing activity in the region, which remains steady.

The level of interest in the region is significant, with out-of-town investors scouring the market as the availability of high-grade property continues to tighten in the major centres.

These investors are actively searching for opportunities with yields predominately between 6 percent and 7 percent for prime quality properties, with some exceptions for the right location and a strong covenant.

Throughout 2018 41% of investment properties sold by Colliers Hawke’s Bay was to buyers from outside of the region, highlighting the confidence in the region’s commercial market, as well as the level of outside interest.

Since we’re at the start of the year I thought I would provide some predications for 2019.

All Sectors

Total annual sales value of commercial office, retail and industrial property in 2019 nationally fell just shy of the forecast $10 billion for the year of 2018. This is due to additional legislative compliance and potential tax changes in 2019 that will add complexity, costs and time delays to the sales process. Approximately 85% of the properties that will sell in 2019 will have an asset value of $2M or under and be highly sought after by investors and owner-occupiers.

Office

The occupier preference for quality space is still hugely apparent which will continue to prove challenging for owners of low quality, seismically poor premises. While the focus remains on the top end of the sector, which will see modest rental growth in the next 12 months, premises at the lower end will likely struggle to lift rents from current rates. Quality office accommodation in Havelock North is in high demand, stage one of Joll Road development is all leased bar 190m2, with stage 2 likely to start construction Q4 19. One Havelock Road has approx. 1400m2 coming to the market soon, with a start date for construction yet to be announced. The redevelopment of the Hawke’s Bay Today buildings in Hastings is underway, with remaining tenancy spaces available from approximately 90-2000m2 which we expect will be snapped up quickly.

Industrial

Industrial precincts across New Zealand will experience an increase in occupier demand that will require a new wave of development activity in 2019. This will lead to one of the biggest years of uncommitted industrial developments commencing. Development in Irongate, Omahu Road and Whakatu with the opening of the expressway extension will all continue to be in high demand.

Retail

Physical retail stores capture almost 90% of worldwide retail sales, according to eMarketer, but it will be a challenging year ahead for many retailers as online and offline competition mounts and discretionary spending becomes more selective in 2019. This will see a re-rating of retail asset values in 2019 with those likely to experience uplifts

being the owners of assets with supportive demographic catchments, not overly weighted towards clothing and fashion and those transitioning into more experiential, entertainment and food and beverage offers.