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How the Industrial, Retail and Office commercial property markets are likely to perform during the next year and the major factors/influences that must be taken into consideration in respect of the anticipated 2012 market performance
Undoubtedly, 2011 will be remembered as the start of the next property cycle. Many corporates and individuals are likely to have significantly better balance sheets, stronger growth prospects with directive and motive to enact on decisions left in abeyance since the market downturn. This is despite the softer economic growth projected domestically and instability recently exhibited in international markets.
Over 2012, banking sector appetite for property is likely to lift due to reduced volitality in values, a re-weighting towards the property sector in most areas and a willingness to grow their loan sheets in a highly competitive market. The property industry will also reveal a premium against a wider asset allocation investment market, as a better assessment of risk, leverage and growth opportunities in the direct commercial property sector will be more commonly recognized. This is already gathering pace with a number of leases, sales, projects and loan books now being crystalised after a long-period of dormancy. Recent evidence of this is the takeover of Bank of Scotland International’s (BOSI) nationwide loan book by investment bank Goldman Sachs and property group Brookfield for $450-$470 million.
As the market focuses on the anticipated course of greater leasing activity and investment, the major centres of Auckland, Wellington and Christchurch will all have different profiles of growth trajectory. This is due to the external influences pushing and pulling either for or against market drivers and influences.
In Auckland, our award winning research shows that the retail sector, especially at the prime end, will continue to grow from its quick recalibration over 2011 and experience positive rental growth. The industrial sector, which was first out of the recovery, is likely to enter a holding pattern with sufficient levels of demand and supply. The sector is adjusting to new, and stronger, levels in occupancy, rents and investment yields, although development activity may be constrained by a lack of land availability. The owner-occupier market, however, is likely to play a more important role. The office sector will be highly competitive characterized by stronger demand with a complex supply situation. This is representative of the lower levels of CBD supply and significant space volumes in quality assets, but only in suburban / fringe locations. The latest Jones Lang LaSalle occupancy survey shows a CBD vacancy rate falling to 12.8% in December 2011 from 14.2% in mid-2011, with this rate expected to move lower due to Jones Lang LaSalle already working for around 30,000 sqm of office tenants signed up and looking for new accommodation in 2012. As a result, Auckland leasing incentives in quality CBD buildings will cool further.
In Wellington, seismic strengthening and the consolidation of government departments will be the key determinants of the office sector’s 2012 growth trajectory. Jones Lang LaSalle’s latest occupancy survey in Wellington CBD indicates a growing vacancy rate from 8.3% in mid-2011 to 10.6% in late 2011. Purchasers will be reluctant to buy buildings without at least 60-70% strength of earthquake ratings under the building code, which will likely result in a decline in capital values for anything below this level. This will be further exacerbated by a lack of occupier demand for such premises. This will lead to ‘seismic obsolescence’ for some building owners and a growing popularity for the prime end of the market.
The Christchurch repair and rebuild will gather momentum over 2012 as government legislation and processes become further regulated. Office and retail development will be encouraged in the central business district with developer’s eager to press on with project plans. This is already evidenced with Jones Lang LaSalle’s Project and Development Services (P&DS) division recently appointed to reconstruct earthquake damage at Merivale Mall on behalf of Tower Property. The P&DS team are also undertaking the redevelopment of the Papanui Road frontage (that has been demolished) and upgrading the internal Mall.
Therefore, the commercial property sector’s 2012 performance story will be sectorised, multi-sped, pegged on the motivations of investor and leasing sentiment and regulated by government legislation. We expect a continuation of rising confidence in specific areas of direct property against other investment opportunities as risk premiums and wealth creation through leverage is reassessed and reprioritised. As more prosperous conditions emerge overall, there will be a renewed commitment and desire to outperform which will be exhibited by tenants, landlords, developers, owner-occupiers and investors. They will be keen to enact on their decisions that have until now been left in abeyance in anticipation of the next growth phase in the cycle.