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NEW ZEALAND, 18 MAY 2010 – Now is the time to take advantage of "repriced development assets and ride the next economic wave", says Charlie Anderson, Jones Lang LaSalle's specialist in development opportunities.
Due to a current lack of development appetite and funding constraints, vacant land values have decreased by approximately 27 per cent to around $270sq m in the Auckland region over the past two years and up to 50 per cent in some situations, Anderson says. "This has resulted in some funders and developers finding they are more exposed than they originally intended and require a workable exit strategy. Development sites that have been tightly held for a number of years in the $10 million and under 'sweet spot' are being watched carefully, with a number of our overseas contacts wanting to be advised immediately when they become available."
A good example of continuing interest in potential development sites was the sale a few months ago of 382-386 Manukau Rd which was sold by Jones Lang LaSalle for $8.2 million to an Asian high-net-worth investor.
"The site is under-utilised with great future development opportunities," Anderson says. "It sits on a corner site with great exposure fronting Manukau and Greenlane Rds with three office buildings of 4330sq m on a 6850sq m site.
While the previous owner unlocked the potential through obtaining resource consent, the new owner will be able to take full advantage of the earn-out potential."
Anderson says "the development game has changed and developers will need to change with it if New Zealand is to successfully develop our land, towns and cities.
"Developers will have to demonstrate good management and the ability to successfully complete developments and de-risk a project upfront and over the timeframe of the project," he says. "Corporate developers and well-funded investors will have a competitive advantage and a number of the one-man band developers of the past will disappear.
"However, we are seeing savvy investors being prepared to put up development funds in order to get developments under way and completed, as long as the project has been successfully de-risked."
Anderson says there has been a huge change in development funding requiring more equity participation from outside parties - essentially replacing the mezzanine finance of the past.
"Developers will either need to have considerable equity in projects or be more open to joint ventures and management agreements in order to continue in the business," he says. "Many significant development opportunities are officially or unofficially available for purchase as evidenced by a number of sole agency listings with Jones Lang LaSalle, which are being marketed in the public domain and off-market. We are currently in control of a variety of stock ranging from character building re-developments, brown-field commercial sites and city fringe residential opportunities - most with resource consent and some with building consent."
Anderson says inquiry from local and overseas purchasers is starting to increase after a three-year hiatus.
"New Zealand is starting to once again become an attractive investment opportunity for overseas purchasers as they go back to the basics of real estate and look for solid assets with good fundamentals, stability, security and add-value opportunities," Anderson says. "The property cycle in New Zealand usually lags the economy by around six to 12 months, suggesting over the short-term, that development margins will be restricted and in some cases unfeasible until occupier demand grows."
Anderson's view is backed by Chris Dibble, head of research at Jones Lang LaSalle, who points out that the focus on land take-up rates in Auckland's metropolitan urban limit seem to have vanished in the chaos of the global financial crisis and absorption rates of vacant business land have undeniably slowed.
"Between 1996 and 2006 the Auckland Regional Council identified the rate of absorption of vacant business land in the Auckland region was about 120 hectares per annum," he says. "Our conservative estimate is that the absorption rate of business land has reduced to around 70 hectares per annum over the past three years, as development activity tracks lower. However, we quickly forget that land in New Zealand is a finite resource and once stability in the market returns there will be a refocus on available business land for development, which will in turn push up values".
Dibble says the global financial crisis weakened market fundamentals, inflated funding and increased the number of development sites brought to market during 2009.
"Owners faced a challenging development environment, with many being forced to postpone development plans or sell their holding entirely," he says.
"But savvy investors with risk appetite and the ability to purchase undeveloped assets are now re-entering the market and taking advantage of the situation. There is unfinished business in the development sector with some well-funded developers entering the market and purchasing significant development sites that have already gained resource consent."
Dibble notes that developers spend significant amounts of time and money on getting resource consent but some developments never come to fruition as individual circumstances change.
"Funding is the oxygen of business growth, particularly for development and more often than not the ability to fund the development becomes constrained."
Dibble says New Zealand is also "relatively in-sync" with Australia's property cycle and the latest investor sentiment survey from Jones Lang LaSalle across the Tasman shows that the real estate cycle is at the bottom of a cyclical trough with respondents to this year's survey overwhelmingly expecting transaction volumes will recover on a six-month to a 24-month perspective.
"The ability to acquire property in the downturn and take a long-term view towards sizeable developments and an earn-out potential can be extremely beneficial," Dibble says. Anderson says many development schemes of the last decade were programmed on tight timeframes in order to maintain project profit margins due to the high costs of land and construction. In a rising market some were successful but when the financial crisis hit, many came unstuck.
"With land prices now recalibrated and realistic development timeframes being considered, the current market is providing opportunities that are attractive again. This especially applies to those properties that have holding incomes, which provide the luxury of time to implement a well considered development scheme while commencing construction at the right time in the cycle."
Anderson cites the Kensington Properties' development in Orewa as a prime example of an investment that changed into a development with a long-term outlook and secured equity backing. "The $560 million development was placed into receivership due to equity constraints in late 2008 with only part of the development taking place. Southpark Corporation purchased the development site in mid-2009 and it is expected with new funding and a longer-term development objective that the site will become extremely successful overtime."
Anderson says the catalyst for a successful development is to identify land with good fundamentals and then match it with the right developer who has the right "master plan".
"However, this is not always straightforward. Sometimes identifying the best use to get the highest value can be tricky."
By Colin Taylor
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