Industrial looking sound, big questionmark on towers
“Tepid to stone cold,” that’s the temperature range give to the property industry by CB Richard Ellis’ industrial division manager, David Jans (right).
Opening a Property Council seminar on the market’s commercial sectors, naturally aligned himself with the fortunes of the industrial sector, saying it has the lowest construction cost and least depreciation, is less prone to speculation and fashion, and importantly lacks the mechanical services that add cost to buildings in other sectors.
He reiterated the warnings of many observers on the city commercial sector, that there is a trend to run New Zealand activities from Australia, New Zealand companies are relocating overseas, and that the inevitability of an Australasian sharemarket would reduce demand significantly in the office sector.
Talking the day before AMP announced it would proceed with its waterfront office tower, Mr Jans said “office towers are a trophy.” He cited the questionable value, at least in the short-term, of the Royal SunAlliance Centre, developed by a single-building company set up by Kiwi Income’s managers, Kiwi Development Trust.
It was no surprise that investors had been lukewarm, as the valuation had been slashed and the development margin was last stated as 5%, but seemed to be heading toward zero, this for a tower that would be completed on time and budget and was “virtually fully leased.”
“It certainly wouldn’t prompt me to head off and build two more towers [Trans Tasman Properties also hopes to announce a start on its tower, also between Fort and Shortland Sts].”
Mr Jans was reserved about his expectation that the retail market would soon be oversupplied, with St Lukes/Westfield planning a major shopping centre on the Mercury Energy site in Newmarket to complete a new quartet, which is starting with AMP’s Botany town centre, to be followed by major centres at Sylvia Park (Kiwi Income) and the Fletcher/Brierley joint venture at the Mt Wellington quarry.
Residential offers opportunities, but Mr Jans warned that investors need to be wary about their timing. “When the residential market moves upwards, everyone has to mortgage their house and buy another one.
There’s an opportunity to make money from residential, but it’s a very small window of opportunity. I’m concerned about the amount of new construction in Auckland. It’s a bubble about to burst.”
He stressed the importance of sticking with Auckland — “My view on investing outside Auckland is, it’s dangerous. Maybe Tauranga, maybe I’d look at Christchurch.”
But all too frequently investors will compare the offerings within a sector and not compare across sectors. Said Mr Jans: “Property remains the lowest-risk medium for creating wealth.”
North-west drift, tenants getting good terms
Colliers Jardine director Michael Judd, looking at the office market, talked of the north-west drift (to Auckland from the rest of New Zealand, then on to Australia, and from there to Asia), which included “covert” moves such as the banking industry’s shifting of some functions to Australia.
An important factor now is the “elephants on the move,” large tenants whose 80s leases are expiring, and yet despite their bulk and an expectation in earlier times that they would face tough terms from prospective landlords, they are able to dictate many conditions.
“They’re standing in the market “because they’re looking for better buildings, building efficiency, quality of services, buildings that will support the squeeze on space, paying the same occupancy costs for a far more functional building.”
Mr Judd said e-commerce was having some beneficial effects, bringing new entrants to the market. He said 20% of leasing last year was to new entrants and Colliers Jardine was dealing with five new overseas parties for small spaces.
Mr Judd predicts significant activity in the suburbs in the next year, particularly Green Lane, helped by high parking ratios and lower costs.
“There are going to be some very interesting developments in Fanshawe St, College Hill, Carlton Gore Rd, and the office market will benefit from changes in the industrial sector.
“Sheds and offices can be apart — Motorola have an office in Mt Wellington and a shed in Singapore. The traditional 80:20 model is not relevant.”
Mr Judd also sees a trend to use clusters — education at the top end of Queen St, technology on the Viaduct Basin, a legal weighting in Shortland St.”
Where does that leave the cbd? Mr Judd said Colliers Jardine expects “a significant rejuvenation in the city as a place to work” with strong commitment to the new Chancery mixed-use development, entertainment around the Civic and cafes around the Viaduct Basin and Princes Wharf.
He sees two sides to the occupancy squeeze. On one hand, workplace practices are bringing more efficient space use, with as much as a 25% gain. “Ernst & Young are a good example, they have 100 staff working off a floorplate of 800mÂ².
“Some firms have over-squeezed.” On the other hand, “smaller firms entering the market are inefficient space users, boardrooms etc taking a disproportionate amount of space.”
Colliers Jardine estimates the business and finance sector will grow 3% in the next two years, and transport and communications 5%, but the consultancy sees room for only one new tower “in the foreseeable future.”
While Mr Judd gave his audience some index statistics, he said “you should not look at Auckland as an index market. It is a property-by-property opportunity.” And, he said, “whilst office is not the most popular sector at the moment, it presents some fantastic countercyclical opportunities.
Sharemarket merger will reduce office demand
Tower value questioned
Retail oversupply, some residential openings
Office squeeze and over-squeeze