July 2015 Auckland Property Market Commentary

Independent market commentary courtesy of Ian Mitchell, Director, Livingston & Associates

Demand from occupiers continued to increase, and this, combined with the limited amount of development activity, over the last two years resulted in falling vacancy rates and moderate rental growth in most sub-markets.

An overview of the key sectors within the market includes:

• The CBD office market conditions have continued to strengthen during the first half of 2015. Demand for good quality space continues to outstrip supply. As a consequence prime vacancy rates have remained at low levels (approximately 2%) placing upward pressure on rents. The lack of space has renewed interest in potential developments. Manson TCLM recently announced their plans to redevelop the NZME site with a 190 metre tower incorporating office space and a 125 bed hotel. The expected completion date is December 2018. Investor demand for office buildings continues to exceed the supply of stock available for sale  
• Growth in demand for industrial space has pushed vacancy rates for prime buildings to historic lows over the last 12 months. This has resulted in occupier demand flowing over into secondary quality buildings and a surge in development activity. Rents for design build premises have increased reflecting the increased demand from occupiers, rising land prices and higher construction costs. Incentives offered to lessees have also decreased. Industrial investment has continued to be favoured by investors because of good return profiles; and
• The demand for retail property investments continues to exceed the number of buildings available for sale. Yields for sub $2 million dollars continue to reflect the strength of demand for investments and may be under-pricing the level of risk associated with these properties. Retail tenant demand remains mixed with strong competition amongst businesses placing pressure on their margins.

Auckland’s economy has continued to expand during the first half of 2015.

Figure 1 presents the trend in net annual overseas migration gains nationally and for Auckland region combined with the annual growth in Auckland house values.

Figure 1:  Net Overseas Migration and House Value Growth

Strong overseas net migration gains have been one of the factors driving growth in Auckland’s economy which is expected to continue over the balance of 2015 supported by strong population growth and a robust construction sector.

The growth in Auckland’s economy will continue drive growth in the commercial and industrial property markets.

Table 1 presents the trend in key market indicators by market sector.

Figure 2 presents the growth in the value of commercial and industry building sales in Auckland region with sale prices in excess of $2million.

Figure 2:  Commercial and Industrial Building Sales (properties selling for more than $2m in Auckland)

Sales during 2014 totalled over $3 billion NZD and were 54% higher than at the peak of the last cycle in the mid-2000s. 

The volume of sales activity is underpinned by low interest rates, institutions reconfiguring their portfolios to fund development activity, lack of other suitable investment opportunities and the return of overseas investors particularly from Asia.

Confidence in Auckland’s commercial and industrial property investment market remains robust. 

Investor demand continues to outstrip the supply of quality investment stock. It is unlikely that the volume of sales experienced in 2014 will be repeated in 2015 as a result of a lack of stock for sale.  

Investors targeting the lower value end of the market are also very active. These investors typically target retail and industrial properties as their favoured investment sectors.  

Table 2 summarises current yields by sector, their outlook over the next six months and the level of investor demand.