Published 18 January 2010
Wellington’s office market significantly outpaced Auckland’s in 2009, bestowing it with the title of New Zealand’s property capital, says Jones Lang LaSalle’s Wellington director of property management, Justin Lester.
Mr Lester said investors were better placed in Wellington to focus their attention on market fundamentals, proactive management strategies & consolidation rather than growth, due to the large & stable Government presence, restricted supply due to the city’s physical constraints and reliable tenant income.
He said Wellington owners fared better on occupancy levels, which helped insulate rental returns & investment yields.
In Auckland, vacancy rates climbed to 13% (prime to 13.2%, secondary to 12.7%). In Wellington, though, vacancy had stopped short of 5% (prime 3.5%, secondary just under 8%).
“The collapse of the finance sector in Auckland and the retrenchment of associated businesses are the primary reason for the significant increase in vacancy. Wellington has been relatively stable in comparison due to fewer company failures, the ongoing influence of the Government sector and smaller exposure to international corporates.
“Our analysis in both cities shows that landlords are slowly coming to terms with potentially negative future prospects and are being more proactive in their retention & attraction strategies. One way has been the increasing financial incentives.
“In Wellington, current incentives equate to around one month rent free for every year of the lease term, or about 8-10% of the annual rent. In Auckland, this is closer to 1½-2 months rent free/year of the lease or about 16-17% of annual rent, principally due to the higher level of vacancy & competing landlord interests.
“The increased incentives have had a significant effect on net effective office rents. In 2009, Auckland net effective rents decreased by about 20% for prime cbd offices. Wellington also experienced a rental decline, but in the vicinity of 12%.
The 20% decline in Auckland net effective rents now has rents at the top end at $374/m². The net effective decline in rents in Wellington was 6% over 2009 and sits at $322/m².
“Landlords endeavouring to preserve capital values are resisting further rental drops by offering smaller incentives or seeking to maintain existing market rents, but landlords with stricter cashflow requirements are more willing to meet tenant demands and are bringing the wider market average down.”
Jones Lang LaSalle agency director Steve Rodgers said prime cbd office yields in Wellington’s better performing market had softened at a much slower rate than Auckland’s: “Wellington office yields softened by around 100 basis points since the peak in the cycle compared to 150 basis points in Auckland.”
He said the concerns surrounding occupier demand in Auckland were the primary factor for the increased softening in Auckland yields. Major Auckland transactions included Forsyth Barr Tower for $41.5 million at an initial yield of 9.5%, the Imperial Building for $22 million at an equivalent yield of 8.5% and 4 Viaduct Harbour Avenue for $26.6 million at a 10.4% yield. In Wellington, there have been 3 sales of $19 million or more at or around a 7.4% yield and 2 more close to 8.2% in 2009, which Mr Rodgers said reflected the more stable environment, the stronger tenant covenant & the stability of long-term leases.
However, Jones Lang LaSalle believed Wellington’s medium-term outlook was more uncertain. Among its many challenges, the Government required its agencies to reduce operating costs by 10% and significantly reduce cbd office occupation. In spite of this, a number of new developments were being constructed or proposed.
Mr Lester said Wellington’s net lettable office space might increase by 29% between now & 2013, with a dozen or so new office buildings. However, he noted that “while a large proportion of the space currently under construction has been precommitted, proposed construction from 2012 onwards has yet to receive sufficient tenant interest.
“The reality for a number of landlords is that their premises will face a rising vacancy rate over the short term and, if they’re unprepared, that may be extended into the medium term.”
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Attribution: JLL release, story written by Bob Dey for the Bob Dey Property Report.