“Looking ahead, it’s tempting to picture endless blue sky for commercial & industrial property,” Bayleys Real Estate managing director Mike Bayley says in a thinkpiece on the year ahead.
“The sector is enjoying an extended cycle with record-low interest rates & a sustained rally of positive market fundamentals. But no cycle lasts forever, and there are some clouds on the horizon – with rising economic uncertainty, regulatory challenges & a tightening of bank finance.
“Investors should be re-evaluating portfolios & strategies to make sure they’re fit for ‘extra-time’ in this cycle. With returns from many assets contracting, there can be a tendency to chase returns up the risk curve. But now, more than ever, it’s critical that investments align with risk tolerance.
“Here are 4 trends I believe will reshape commercial property in 2020 & beyond….”
Industrial shines on, but some buildings start to change beyond recognition.
Industrial property was a star asset class over the last decade, and will be in 2020 & beyond. But that’s about all that will stay the same as transformation sweeps the logistics scene within this property type.
Leading investor Property For Industry cites research ranking secondary industrial property first and prime industrial second, out of 12 asset classes for forecast total returns over the next 5 years. For industrial secondary property, the forecast is 11.5%.
A lack of development land, coupled with new technology & e-commerce, will start to change the face of industrial property. Online sales are tipped to hit $US1 trillion globally by 2023, driving industrial property demand for warehousing & freight movement.
Around $US800 million was spent on logistics robots last year and this is tipped to hit $US4.6 billion by 2023. Amazon alone has 100,000 robots. This revolution will gain traction here and start to change the operation, configuration & economics of industrial real estate.
Logistics company DHL & plastic manufacturing firm Sistema are among the early adopters, with automated facilities at Auckland Airport. As costs fall, picking & packing by robots will become common. These developments, plus cost & scarcity of land, will intensify the focus on maximising the use of warehousing & logistics property.
Warehouses will expand upwards. From a typical stud height of 9m now, some owners & tenants are starting to look at studs of up to 30m – more typical of a 10-storey office tower.
Buildings are going green
The last decade closed with the passing of the Zero Carbon Act with bipartisan political party support. This means New Zealand’s shift to zero carbon by 2050 is now locked into law, and – like it or not – property will be in the thick of it.
The NZ Green Building Council says 20% of domestic emissions come from the construction & operation of buildings, so both developers & landlords will face growing demands to cut their carbon footprints. Think tenants pressured by eco-conscious millennial staff & customers; or Government agencies & departments who will be required to meet the legal requirements.
The Green Building Council has produced a ‘roadmap’ to make all buildings zero-carbon, and wants progressive changes to the building code – with labels laying bare the performance of all non-residential buildings of over 1000m². The council says developers & owner-occupier tenants will need to use more eco-friendly building materials like timber, and reduce concrete & steel.
Regardless of what’s adopted, change is coming. There will be costs, but also advantages, including energy savings & future-proofed investments. Some are taking a lead, such as Auckland-based property developer Mansons TCLM, which achieved a world-leading 6 green star office design rating for its new commercial building at Wynyard Quarter. The industry will need to rise to the challenge.
Infrastructure: build it and they will come
If you want to know where future hotspots will be, follow the big public works. Starting in 2020, the decade is set to bring a record boom in new infrastructure spend after decades of under-investment.
Treasury estimates $130 billion will be spent on projects which will lift surrounding economies & job markets, and ramp up property development & leasing activity.
Bayleys Research has identified $29 billion of transformative projects in Auckland – led by the game-changing city rail link. By doubling the workforce within an easy commute of cbd employers by 2024, the city rail link will ignite the office market and spawn vibrant mixed-use hubs around stations.
Precinct Properties’ $1 billion-plus office, retail & hotel development at Commercial Bay beside Britomart is well on its way to opening in 2020. Including new Aotea & Karangahape stations and a redeveloped one at Mt Eden, market analysts expect up to 200,000m² of development at these hubs, including offices, hotels, shops & apartments.
Elsewhere, roading projects will feed distribution & logistics real estate activity, building on the industrial development already seen in places like Horotiu & Te Rapa Gateway near the Waikato Expressway. Meanwhile, a new $1.4 billion hospital in Dunedin will stimulate development of retirement villages in the city.
Attention turns to syndications & property funds
As the era of record-low interest rates stretches on, with the prospect of an even lower official cashrate in 2020, syndications & property funds will attract new attention as investors scour the markets for yield.
Commercial & industrial real estate still offers the potential for delivering solid capital growth & yield returns for first-time investors who don’t necessarily have the expertise or capital to invest in large property directly through purchasing assets.
Property funds & syndications offer a relatively simple & accessible way to take part in the ownership of prime commercial & industrial assets at entry-level prices upwards of $10,000.
These types of investments will become ever more attractive to new or smaller investors in particular, as after-tax returns from many interest-bearing bank accounts languish barely above inflation.
Some recent property fund & syndication products have offered more than double the returns available from term deposits with the major banks. Buying into these types of products can also give access to diversification in property types, locations & tenant profiles for a fraction of the up-front capital needed to achieve this through direct property investment.
New offerings are set to diversify further into areas such as tourism & residential. As such, they’re set to become an increasingly mainstream investment option and one that’s firmly on the radar in the year ahead.
Attribution: Mike Bayley.