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New Zealand

Future-proofing property choices



Long term investment with development potential/new-zealand/en-gb/news/916/long-term-investment-with-development-potentialAUCKLANDLong term investment with development potential
Former Fire Station on high profile corner site/new-zealand/en-gb/news/915/former-fire-station-on-high-profile-corner-siteCHRISTCHURCHFormer Fire Station on high profile corner site

The changing business tide is likely to leave some fish out of the water as they try to deal with the 'new norm', reports Colin Taylor.

The commercial real estate sector in New Zealand enters a new era this year as occupiers and investors reassess their property decisions, says Chris Dibble, the head of research at Jones Lang LaSalle.

"While the industrial, retail and office sectors are all moving towards 6pm on the property cycle clock, it is increasingly apparent that all property sectors will emerge from the downturn into a new business environment from 2011," says Dibble.

"Many investors and occupiers who have survived the subdued economic conditions of the past years are looking to ride out the sluggish growth until better conditions arrive and then get back to business as usual."

"While this strategy may work for some, many will find themselves like a fish out of water as the tides have changed. It won't be practical or possible to conduct business as usual because business won't be 'usual'."

He cites figures released from Statistics New Zealand's Annual Enterprise Survey showing that business operating surplus in 2009 had almost halved since 2007.

"Operating surplus for all industries was at just over $36 billion for 2009 compared with just over $61 billion in 2007. Total income was up by 8 per cent over this two-year period, however, total expenditure was up by 14 per cent," says Dibble.

Companies remained wary about increasing costs and bottom-line performance.

John Church, head of office leasing at Jones Lang LaSalle, predicts that increasing vacancy, decreasing rents and increased landlord incentives will be a feature of the market for awhile yet.

"Tenants do need to remember, however, that quality assets and quality space will always separate themselves from low-quality assets at any part of the cycle," says Church.

Church says the agriculture, industry, services and finance sectors provide insight into how New Zealand's commercial property sector is likely to recover from economic lows of 2008 and early 2009.

"While the services and finance sectors of New Zealand have been soft since the global financial crisis in 2008, the pillar of support for New Zealand's growth has been the agricultural sector, with New Zealand's largest GDP contributor being agriculture,'' Church says.

"While many businesses would like to see our recovery more at the services and finance part of the recovery process, New Zealand's economic activity is more likely to initially revolve around the agriculture and industry sectors."

Sam Smith, manager of the industrial team at Jones Lang LaSalle, says: "While the economic recovery is focusing itself around the agricultural and industrial sectors, investors and occupiers in the industrial sector are future-proofing their property decisions."

"Diversifying revenue and storage capacity are two of the most common information requests."

"Sale and leaseback or property with holding income provides an alternative cash flow for investors and businesses that want to diversify their revenue streams."

"Buildings with a high-stud height provide maximum storage opportunities. Properties that have these characteristics will trade well over 2011 and will be essential in the 'new norm'."

Smith says this is already occurring. Owner-occupiers Smith & Nephew, a global medical technology company, along with joint-venture partner BSN Medical, last year undertook a partial sale and leaseback of their site in Rosebank Rd, Auckland.

Positioned in the area for more than 45 years, Smith & Nephew's global mandate of third party logistics (3PL) enabled them to offload unused warehouse space and sell the site to unlock their balance sheet, while retaining their superior location.

Smith, who negotiated the deal in partnership with David Mayhew, industrial sales broker at Jones Lang LaSalle, says new owner-occupier Blum diversified its revenue stream with holding income as well as securing more efficient space.

Blum, a global company that produces a range of lift, hinge and pull-out systems for kitchens, will move to the 1.4ha site at 621 Rosebank Rd this year and occupy 2000sq m of high-stud warehouse with renovated office and showroom space.

The retail sector is also experiencing a sea change. New Zealanders remain budget conscious and have moved from a spending to a saving mentality for the time-being. This is affecting how retailers are conducting business and preparing for the years ahead.

Chris Beasleigh, a retail broker at Jones Lang LaSalle, says retailers will need to adapt to another "new norm" - realisation that consumers probably won't spend as much.

"The recovery in retail sales values and volumes will be gradual as there will be subdued increases in house prices, which people typically leverage off to buy goods and services," says Beasleigh.

"Retailers will need to fine tune their core attributes that attract consumers by looking at their professional service, price-points, loyalty, target markets and location."

"Location will be a defining factor, which is a core value that can be overlooked during the market peak frenzy," says Beasleigh.

"The 'new norm' will see a re-adjustment back to location being at the top of everyone's hit list."

He says this is the characteristic of a multimillion-dollar retail building at 5 Wagener Place in St Lukes scheduled for completion in July this year that will complement the impending expansion of the nearby Westfield Shopping Centre. The site, being redeveloped because of a fire that destroyed the premises earlier in 2010, is now attracting strong levels of inquiry.

"One of the first retail redevelopments since the GFC, Concord Properties, who own the site, will rebuild in one of the most sought-after locations for Auckland retail at the moment,'' says Beasleigh."

"Located opposite the soon-to-be-expanded Westfield St Lukes Shopping Mall, Animates pet shop has already signalled their interest, with just over 1100sq m of space with multiple options still available."

Dibble says it is important all players in the commercial property office, industrial and retail sectors look forward as they move into the next stage of the cycle and focus on immersing into the "new norm" business environment - because this will be critical.

"Change is constant and the ability to be flexible, adapt and transition into the 'new norm' will be a huge task."

"Yes, there will be growth, but things will be volatile and inconsistent for some time yet. Welcome to the 'new norm'."