Residential and industrial property development tanking

A sharp rebound in migration is bolstering demand for housing just as development slows.

Friday, October 27th 2023, 9:44AM

It mirrors the situation which arose post the 2008-2009 global financial crisis (GFC), which triggered a surge in property prices and rents and made houses unaffordable for many.

Colliers International research associate director Ian Little says while the slowdown poses challenges, a more profound shift might await New Zealand's real estate landscape.

“The slowdown in development, if sustained, could lead to a supply-demand imbalance, particularly within subsectors in which tenant demand remains evident.

“These supply-demand imbalances are likely to emerge first within the residential and industrial sectors followed by the prime end of the office market.”

Immigration, especially into Auckland, is already starting to show up in housing demand which once again is beginning to exceed supply. At its worst, pre-pandemic, Auckland was short of 15,000 houses every year for about a decade.

Little says avoiding a repeat of this scenario will require collaboration between policymakers, developers, and investors.

He says the drop in development activity can be attributed to a range of factors. Building consent data clearly illustrates the brake on momentum within the residential apartment and industrial sectors.

Measured over a six-month rolling period, consents for apartment developments across the country reached a cyclical peak in January this year, with 2,793 apartments approved – the highest figure since May 2005. Subsequently, consents have fallen sharply and by June this year were down by nearly 50%.

The cyclical peak for industrial sector consents was reached in the six months ending March last year, when the total floor area consented reached its highest level this century. However, recent months have seen a substantial decline in new consents, with the June figure dropping by 37% from the peak.

While office and retail consents tend to be more volatile due to the significant impact of a few large projects which have longer development timeframes and lag in dataflows, other indicators unmistakably demonstrate the drop in development activity.

Recent data from Statistics New Zealand reveal quarterly ready mix concrete production in June down 10.9% year-on-year, underscoring the sluggishness in the construction sector. In the year ending June, production dropped by 4.2% compared to the record high of the preceding 12 months.

Little says the most prominent factor in declining development is the cost of financing and reduced access to funding. “Interest rates have surged at an unprecedented pace as the Reserve Bank seeks to curb inflation. Consequently, financiers have adopted a more cautious lending stance, making it harder for developers to secure funds for their projects.”

Another pivotal factor contributing to the slowdown, he says, is the substantial rise in construction costs. Escalating material expenses, disruptions in supply chains, and a shortage of skilled labour have all driven up construction costs.

Feasibility re-evaluated

Achieving project viability is compounded by the cooling economic climate, which has made an increasing number of businesses sensitive to rising rental costs. This situation frequently compels developers to re-evaluate the feasibility of their projects, potentially resulting in delays or cancellations.

Mitigating bureaucratic constraints and minimising the financial burdens on developers will clearly be of benefit, Ian Little, Colliers International research associate director says.

“This could involve temporary or permanent adjustments of development levies, removing obstacles to overseas investment in the build-to-rent sector to significantly accelerate expansion and embracing cost-effective modular construction to increase project feasibilities.”

Little says on the commercial front, demand for industrial premises has remained strong, particularly from an expanding logistics sector. Despite this and regardless of rapidly rising rents, developers are encountering mounting challenges in making projects financially viable.

Land shortages and high prices

He says in addition to the general constraints, most established industrial precincts are grappling with land shortages, resulting in significant rising prices. Consequently, maximising the use of land has become increasingly crucial to make new projects feasible. Developers are doing this by increasing cubic capacity rather than merely expanding floor areas. The rise in stud heights has come by the use of automated loading and collection technologies, making taller racking systems possible.

“Feasibility for large-scale office projects remains a challenge given the economic backdrop and evolving work practices. However, the demand for high-quality, environmentally sustainable premises in prime locations is continuing.

“This demand continues to underpin developments, albeit with investors and developers adopting a longer-term outlook.” Little says this is illustrated by a recent joint venture partnership formed to invest in the regeneration of Auckland CBD’s Te Tōangaroa precinct.

The collaboration includes Precinct Properties, PAG, and Ngāti Whātua Ōrākei. The land will remain under the ownership of Ngāti Whātua Ōrākei, while the investment partnership will hold a 123-year prepaid ground lease. This pre-payment alleviates uncertainties surrounding ground rent increases, a concern that has hindered investment in premises located on leasehold land in other areas.

While the prevailing slowdown has some way to run yet, Little says a return to an increased level of development will clearly occur. “History demonstrates that development cycles are intrinsic to the industry. This will clearly provide opportunities for experienced and well-financed developers.”

Tags: property investment