Property: Yields look to firm up this year

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Friday, February 4th 2000, 12:00AM

by Philip Macalister

Markets are constantly evolving and property is no exception. Throughout 1999 New Zealand’s property markets experienced differing degrees of success.

Investors renewed their interest in industrial property as a result of the relatively high yields, lower vacancies and longer lease terms. In contrast, the CBD office markets remained difficult for the second consecutive year even though the office markets have undergone significant structural change in recent times.

The retail property sector has been the strongest property performer. Major shopping centres have showed solid growth on previous years and retail sales, along with income and capital values, have improved and look set to continue into the future.

 

Office Environment

The drive for improved occupational efficiency, business mergers and acquisitions, flat employment and the ‘north and westward drift’ all contributed toward a reduction in CBD demand. In addition, tenants are increasingly focused on building standards, particularly the work environment within the building. In return for technology and space saving solutions, tenants are tolerating the higher rentals that come with high quality accommodation, however, there is downward pressure on rentals within secondary quality property.

Not only has this revitalised interest in accommodation issues, it is also underpinning recognition that accommodation advantages are better achieved in prime quality properties. Consequently, this has meant a general reduction in total demand for office space, particularly lower quality space, and has depressed rentals.

These trends have important implications for CBD office property investment, particularly in terms of its impact on traditional tenant demand patterns, future returns and management approach and investment strategy.

AMP’s research shows this will contribute to the emergence of a two-tier market, where premium office property will outperform secondary office property over the medium to long term. Property market commentators Jones Lang Laselle (JLL) agree.

AMP is forecasting that higher quality property will dominate leasing activity and experience positive net absorption, at the expense of poorer quality stock. The AMP NZ Office Trust owns three of Auckland’s top five buildings, and two of Wellington’s top four buildings. That these have an impressive 99.8 per cent occupancy rate substantiates this view.

According to JLL, overall vacancy rates in the Auckland CBD are forecast to remain above 10 per cent over the next five years, with the majority of this vacancy concentrated in poorer quality accommodation.

These trends confirm the AMP NZ Office Trust strategy to focus on superior quality office accommodation to ensure higher relative performance in this sector

Retail Environment

Early indications for the performance of the retail property sector in 2000 appear positive. Retail sales over the Christmas period and early January have shown significant growth on previous years. However, we offer a cautionary note for the balance of the year as the impact of higher interest rates and future government policy may subdue current growth levels.

In line with retail sales growth, modern well leased shopping centres are also experiencing good growth. Not surprisingly good properties are being tightly held.

Consumers are showing strong preference for larger suburban malls to the detriment of smaller shopping centres and metropolitan premises. Supported by a consolidation of the retail sector a smaller number of larger dominant centres will emerge.

Already several major retail developments are well underway including, the Botany Town Centre and Glenfield Mall redevelopment. Several smaller expansion/refurbishment projects are also planned. These projects are either in high population growth areas or in areas that are currently under-serviced in retail facilities; in some instances there is a combination of both.

Major retailers such as The Warehouse and Harvey Norman are also aggressively seeking further expansion opportunities.

AMP believes retail property investment will continue to be a strong performer. AMP intends to capture some of this strong growth through its investment in the innovative $180 million Botany Town Centre. The first stage of this two-stage project is scheduled to open in May 2000.

Industrial Environment

The industrial sector experienced strong investor demand during the first half of 1999 with prime yields as low as 9 per cent. Investors including syndicate promoters, institutions, public companies and private trusts/investors sought industrial property for four fundamental reasons:

• Long lease terms
• Simple construction and low maintenance costs
• Low vacancy (less than 6 per cent in Auckland according to latest JLL survey)
• Higher yields than office and retail investments of comparable quality

A number of diversified investors also sought to increase their weightings in industrial property to diversify out of office investments as a reaction to a forecast oversupply in the lower tier office market.

While tenant demand was relatively subdued in 1999 as a result of the poor performance of the economy, vacancy rates held firm with minimal growth in rental levels.

Overall, prime yields are expected to remain firm despite higher interest rates. The higher rates have to some extent been factored into current yields and there will continue to be a short supply of well leased quality investments. Tenant demand is also expected to increase due to a more buoyant economy, greater focus on the manufacturing sector and growth in the distribution sector. As a result we anticipate firm to rising values, stable or lower vacancy and moderate rental growth.

Anthony Beverley is the executive manager of the AMP NZ Office Trust.

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