Posted on Jan 04, 2019
Trying to predict what a market with so many external influences may do is a fools game at the best of times. But in an age where the world is so inter-connected, and where so much of the world seems to have taken crazy pills, it becomes even more difficult. We therefore preface our predictions with the rider that any major upheaval is likely to come from offshore.
Within New Zealand, and particularly within the “Golden Triangle” (Auckland / Hamilton / Tauranga ), we see the major influence on prices, rents and days to sell, being “catch-up”. Over the past few years there was firstly a hiatus in new builds, and then when they did start to come on line, rents reflected the build costs, with major gaps to market rentals. Those rentals for new builds are slowly starting to filter down to pro-rata rentals for existing buildings. With the norm for most industrial leases now being two yearly reviews to market, we see 2019 being the year when some substantial rental increases are likely to hit for many tenants.
There exists a relativity between the costs, and rentals for, new builds, and in many instances that relativity has not yet caught up. So 2019 is the year of the “catch-up”.
There are however, two major “buts” attached to those relativities, and the extent to which rentals can and will rise. The first is affordability. Many new builds, and the associated rentals, are going to be leased to corporates, multi-nationals and or established (and larger ) businesses. There are many smaller businesses who lease B and C grade buildings who will be challenged to be able to afford rentals at levels in line (on a pro-rata basis) with rentals for premium buildings. This affordability, or quite simply an inability to pay higher rents, is likely to cause an element of phantom market activity. Tenants with lease renewals will scour the market looking for cheaper rentals; which with current occupancy rates will be almost impossible to find.
The second “but” comes down to quality. There will be instances where landlords are trying to increase rentals so that they are proportional to rentals for new builds. But an older building that has not been upgraded is not a new build. And there will be tenants who take the attitude that if they are going to be paying a higher rental, then they may as well pay for a new build – or at least a building of better quality. And that argument has some justification.
Interest rates will once again play an important part in the pricing equation. Generally they provide a marker against which yields move in parallel. However, we wouldn’t like to try and pick which way interest rates will move in 2019. Dependent on which economist you subscribe to, they may move up. Or they may move down. And to make the view even murkier, we are starting to see a divergence between Bank interest rates and the OCR. Work that out!
And just one more thing…
We are continuing to see many Baby Boomers of an age and time of life where they want to sell their businesses and retire. Whilst there will be some for whom the proceeds of a sale barely pay off the mortgage, with others there will be a reasonably sized nest egg they want to invest. Perhaps more so than the general population, ex-business owners tend to favour investment in property, over which they have some control, rather than bank deposits, bonds or shares. After a lifetime of hard work building a business, often they don’t want to cede control of their investment elsewhere, but would rather retain some form of control, which they can do with commercial property.
The flow of capital arising from the sale of baby boomers businesses is likely going to provide a steady market for quality tenanted investments. In particular, the capital coming from sales of rural businesses, farms and orchards in particular, will offer a buffer against softening yields in provincial cities.