market report - commerical/industrial
In determining a current market value of the subject property we are required to be cognisant of underlying economic conditions and the flow on implications these may have to investment and divestment decision making across the broader property markets.
The world economy has remained on centre stage for the last two years. The credit crunch that ravaged financial markets has now gone to work on real economies.
We have seen the likes of Australia come through reasonably unscathed. At the other end of the spectrum, a number of European countries, of which Greece is the worst, are in extreme difficulties. Within New Zealand, recovery to date has been patchy. It is the opinion of some economists that the building blocks for a stronger upturn are moving into place, although this is subject to the global economy not taking another backwards step.
From a property perspective, one of the building blocks is the requirement of the New Zealand economy to continue deleveraging. This is a growth suppressant in the near term, with it holding the housing market in check. The deleveraging process however is required if the upturn is to gain strength.
The investment market tends to have shown some weakness and further deterioration over the last 12 months. As the poor economic conditions in New Zealand continue, more and more tenants are defaulting, placing building owners at increased risk.
Good well tenanted properties have continued to sell well and this is reflected in 45 Newton Street which was tenanted on a 10-year lease by a national company. This sold at a 5.9% return. Further, in a lower price bracket, we have seen a Burger King with 4.5 years to run on its lease at a return of 6.5% and more recently 6% for KFC at Papamoa.
As the standard of tenancy declines, the rate of return rises sharply. To this extent, we have seen an industrial property in the $1,000,000 price bracket selling at 9%. This was leased to two local tenants but on relatively short-term leases. On the other hand a property in Birch Avenue sold at 7.5%. There are three tenants involved who had been in business for many years.
Within Fraser Cove we have seen approximately six sales in the last six months. These range from 6.5% for the Burger King tenancy, as mentioned above. A Video franchise sold at 7.1% with other shops in the range of 7.1% to 7.6%.
In November a property sold for 10.9% in an inferior industrial area. This was considerably over-rented although the tenancy was reviewed around CPI.
The reality is that the market is now correctly assessing risk. With higher risk comes a higher capitalisation rate. This now covers a band of 3% to 4%.
We note the Official Cash Rate has recently been lowered to 2.5%. This should have the effect of moving more purchasers into property investment and income producing assets. The share market has already responded. On that basis, we can still see strong demand for properties leased to established national companies on a long-term.
The market however for development properties with no cash flow has remained very weak. Funding for such properties is now very much an issue with the demise of the finance companies. Banks will generally not lend for the capitalisation of interest and any developer requiring funding needs to have an income stream to meet interest repayments. The major banks appear to be only lending 40% to 50% on such development projects.
There are some developers with uncompleted projects who have been left with high interest rates and minimal ability to refinance.
Further, prices in the upper price bracket have tended to sell at higher returns. An example of this is the Downer property. This was a new premises sold on a lease-back situation at 7.42%. The total sale is in the order of 8.95% and there was a long-term lease. In Aerodrome Road, a further property owned by a national tenant was sold for $8,400,000, or an 8.33% return. This was a large industrial site and while rentals appeared to be on the high side, it was compensated by CPI reviews.
Mount Maunganui properties have continued to sell at lower capitalisation rates than those in Tauranga. This is reflected in the previously mentioned Newton Street sale which sold at 5.9%.
Owner/occupiers tend to purchase at returns at the cheaper end of the spectrum with a range of 6.5% to 8% yield. Properties in this range tend to be under the $1,000,000 price bracket.
It is our opinion that capitalisation rates and yields in Tauranga tend to be lower than other major centres in New Zealand. This is a result of the continual high demand to buy commercial property within the city with a large number of investors living in Tauranga. Outside investors perceive the city to be a growth centre.
In summary, the tenant and length of lease are of prime concern in this market. We believe purchasers are reflecting the fact that it is more difficult to obtain tenant in what is a poor market. When rents are slightly above market, if there is a strong long-term lease there will still be reasonable demand.