Soaring land values and lower returns for Queenstown

The weight of international and domestic investment capital has slashed yields while maintaining strength in Queenstown’s property market.

Tuesday, May 15th 2007, 11:54AM

by The Landlord

Property services company MAC Property has released its annual report on the projected performance of Queenstown’s residential, apartment and commercial markets.

Its market projections include an all time high in commercial land values, an acute shortage of industrial land, a relatively static housing market – particularly at the low to middle end, increasing values at the upper end resulting in a growing demand for fractional ownership, and continuing pressure on the prices of new apartments.

Current land values for prime CBD property at more than $12,000 per square meter and industrial land values at $650 per square meter mean development margins relative to current rental levels are virtually non-existent.

Meanwhile, as existing and first-time tenants soak up new office space a surplus of secondary office space in central Queenstown is becoming apparent.

The report predicts that Frankton will become the domestic CBD for the area, with central Queenstown remaining prime commercial retail for tourism shopping and food and beverage, and commercial yields stablising at 5-6%.

The shortage of industrial land is predicted to force demand for it into Alexandra and Cromwell.

The reality is that some of the development may be better catered for in Cromwell and Alexandra, the report states. “While part of the problem is a lack of suitably zoned land, we do not believe that simply rezoning land will alleviate the problem of high land values.”

“To make land more affordable for industrial activities that are essential to Queenstown and Wanaka, additional land needs to be rezoned with restrictions that will prevent that land being developed for mixed-use business activities.”

The report also states that Queenstown developers are catering for an ever-increasing affluent sector, resulting in static value levels for the lower to middle end of the property market, tied to affordability and high interest rates.

This stagnancy is pushing speculative buyers out of the market, as the likelihood of quick capital gain falls, and new apartments originally sold off plans are resold to the local market.

As a result, new developers seek more affordable investment options, and demand for fractional interest ownership is growing.

The report outlines critical demand issues as large scale developments Jacks Point, Remarkables Park, Kawarau Falls Station, Five Mile and Millbrook West forge ahead, collectively representing more than $5 billion of investment. While the majority of consents and zoning approvals have been achieved, the issue is where the demand will come from, at what value level and at what length of sell-down period.

Overall, the Queenstown property market has historically trended in eight to nine year cycles, peaking in 1986, 1994 and 2003.

The current cycle has seen a modest decrease in sales volume, and a stabilisation of prices since 2003, compared to more marked peaks and troughs during the previous two cycles.

The report states that the main potential risk is, as always external. Queenstown’s fundamentals are strong, however, a significant share market correction would impact on the discretionary investment dollar that is underpinning a lot of the larger developments.

The report says the market will continue to grow at an ever-increasing rate as the population and visitor numbers escalate over the next ten years and current capacity for growth reaches at an all time high.

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