The popularity of commercial property as an investment asset class shows no sign of fading this year, as a growing number of investors search for superior returns.
With investors facing a scarcity of suitable purchasing opportunities in Auckland and Wellington, the spotlight has turned to Christchurch, where much of the CBD office and prime industrial building stock is new and of high-quality construction, with attractive long lease terms.
This is illustrated by some of the key CBD assets which have changed hands over the course of 2020 and into early 2021. Some of the large transactions since early 2020 include the sale of the Vodafone building at 213 Tuam Street for $59m, the Manawa building for $76m and 123 Victoria Street for $59m, all brokered by CBRE; as well as the $60m sale of the PWC Centre at 60 Cashel Street.
Tim Rookes, managing director of CBRE Christchurch, says these transactions were concluded at yields which set new benchmarks for large office assets in Christchurch, demonstrating the increased weight of demand and competition among the buyer market. CBRE Research estimates that prime Christchurch office yields have firmed by around 50 basis points over the past six months.
A trend towards reducing office vacancy rates in the Christchurch CBD, driven by business confidence, is also boosting the attractiveness of CBD assets among investors, says Rookes. As at December 2020, Christchurch CBD office vacancy was 10.7%, equating to around 30,000m2 spread over 281,000m2 of office space, according to CBRE’s latest research. This is a significant improvement compared with the 16.2% vacancy recorded in 2018.
Vacancy is lowest for high quality prime buildings, with prime CBD vacancy at 8.3% compared to 17.8% for secondary stock. Office rents have also remained stable during the past three quarters, while rents are showing upward movement at the upper end of the market, aligned with the reduction in vacancy, Rookes says.
“Unlike other markets Christchurch has not been impacted by an increase in subleased stock entering the market, a trend we hope will continue into 2021 with sustained business confidence.”
Without question one of the largest driving factors behind the increased level of larger-scale property investment nationally is the low cost of capital. However, on a more micro level, investors are also taking notice of the effects of the pandemic on various business sectors, for example the increase in online shopping which is driving demand for more distribution and logistics space – making the warehousing property sector particularly hot, he says.
“We’re also seeing the rise of more investment vehicles and new parties entering the market, particularly investment syndicates and funds which allow smaller investors the chance to buy into higher-value commercial property opportunities. These parties are now the dominant players in the market and the entry of new players into this arena is only increasing the weight of demand.
“One of our biggest opportunities has to be the industrial market, given Christchurch’s position as the second largest industrial centre in New Zealand, and the main distribution hub for the entire South Island. However, many of the city’s prime warehousing and logistics facilities are tightly held by owner occupiers and investors. As agents, the main challenge is sourcing enough saleable stock across all sectors to satisfy demand.”
For syndicators and funds, the challenge is in securing suitable assets in an increasingly competitive environment where yields continue to trend downwards. Strong investment strategies and governance are necessary to protect investors’ capital and ensure the focus remains on quality acquisitions, rather than risk-taking in order to meet asset allocation targets.
In a market where everyone wants to get their hands on property, agents must also recognise that as opportunities become even scarcer, a focus on high standards of conduct is crucial for the reputation of the real estate sales industry as a whole, Rookes adds.
“Looking ahead to the rest of 2021, continued growth in demand from both the national and offshore investment markets for property in Christchurch will result in yields continuing to firm. Christchurch is well placed to capture more of the nationwide investor demand, with more large-scale CBD assets set to hit the open market in 2021. These will be keenly sought after among the investment community around the country.”
ABOUT CBRE GROUP, INC.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 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.
