High demand for quality space across sectors and strong economic confidence points to growth
The capital value of commercial property in Wellington is expected to go through a sustained period of growth with low vacancies across sectors and rental rates expected to rise, according to latest research by CBRE New Zealand.
The commercial real estate services company’s Wellington MarketView report reveals vacancy for prime CBD office space is as low as 0.7%, with a yield of 7.31%, while prime industrial vacancy is even lower at 0.2% with a yield of 7.27%.
New Zealand’s capital city has proven a popular investment location in the six months to December 2017 with 12 properties over $5 million changing ownership, the majority in the office sector and the largest and highest profile being the sale of the Majestic Centre to an offshore investor for $123.5 million.
Institutions have been the main purchasing group at 83% of transaction volume, or $282 m, which is well above the 10-year average of 28%.
Managing Director for CBRE in Wellington, Matthew St Amand says buyer confidence and levels of international liquidity have not been seen as strong as it is now. As a result, significant sales opportunities are expected.
“Due to relatively high returns, elevated investment levels are expected to continue in Wellington from both domestic and international sources. Forecasted rental growth in prime stock compared with other investment destinations keeps Wellington in focus for investors.
“It all comes down to the high demand for quality and suitable office space. Allaying previous concerns owners and investors had about expected increases in vacancy rates for this year and next. Whilst development of new stock is expected to increase, nothing has been released as of yet.”
In the office market, net effective rental rates increased in all grades except for Grade C - the largest increases being in good quality B and A stock.
With the introduction of two new buildings, and the levels of pre-commitment already attainted, low vacancy rates are expected to continue. Prime office yields firmed 2 basis points in the past six months and the secondary market firming by 4 points.
In the industrial sector, rising rental and low vacancy rates are continuing to support development agendas. The development demand contributed to an increase in land values to $365/sqm over the past six months. The largest increases occurring in Plimmerton and Porirua.
Meanwhile industrial yields have firmed in the past 12 months. The largest sale being The Hub in Seaview purchased by Augusta for $44.9 million with a 7.46% yield. As the report notes, as the market enters traditional late cycle behaviour, yields are expected to firm marginally for the rest of this year.
In the retail sector, sales reached $8.9 billion over the past 12 months. Thus, representing a year-on year increase of 4.7%. Reflecting a flow on effect from growth in the housing market.
In the retail sector, vacancy rates of 6.0% demonstrated a slight increase across the market from the previous year figure of 5.3%. The largest increase was in the prime retails market - attributed to Top Shop vacating a major space.
Like office, demand remains for prime retail space. Current stock is not suitable to meet the demand as typical unit sizes are too small for major brands. As St Amand points out, if retailers are confident of location and floor configuration, they will pay a significant premium, as these factors will in turn drive revenue.
Richard Carr, Senior Analyst at CBRE, summarises the report; Given the constrained market and high occupier demand for quality high NBS rated buildings, all indications point to more development across sectors in the Wellington market, but this may be more of a medium-term outcome.
“While rental growth is forecast rates are still below the economic feasibility required of new developments and in the short-term value add capital investment is looking more likely to be in the form of small scale refurbishment than complete overhaul.
“There will come a tipping point in the medium term where rental rates get to a point where we can expect large scale capital work programmes to cater for prime demand. Especially given the fact prime rental forecast is counter-cyclical and will present attractive offering to investors seeking an attractive return.
“Contributing to this is the increase in economic confidence in the region and a change in Government which is viewed in a positive light for Wellington, providing the potential of an expanding public sector being supportive of economic growth.”
ABOUT CBRE GROUP, INC.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2017 revenue). The company has more than 80,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com..
