Investment Guide New Zealand Property Market

Transcription

1 Investment Guide New Zealand Property Market savills.co.nz

2 contents New Zealand Property Investment Market Summary 03 Investing in New Zealand 04 General Information on Investment 05 New Zealand Economic Trends 11 Auckland Office Market 14 Auckland Industrial Market 19 Retail Market 23 Residential Property Market 27 Rural Property Market 30 Kevin Richards Senior Executive Capital Transaction +64 (0) (0) krichards@savills.co.nz Doug Osborne Joint Managing Director Corporate Real Estate +64 (0) (0) dosborne@savills.co.nz Paddy Callesen Joint Managing Director Commercial Sales +64 (0) (0) pcallesen@savills.co.nz Savills New Zealand The General Building Level 8, 33 Shortland Street Auckland NZ 1010 PO Box 1191, Shortland Street Auckland NZ (0)

3 new zealand property investment market summary New Zealand is an island country in the south western Pacific Ocean, located some 2,000 kilometres east of Australia. It has a population of 4.4 million. Auckland is the country s largest city with a population of 1.4 million people and Wellington is the capital (population of 0.4 million). Other main centres are Christchurch, Dunedin and Hamilton. Auckland Hamilton Wellington Christchurch Land Area Total Population 268,021 m2 4.4 million Dunedin Population Density 15 / m 2 Capital Principal Business Cities Currency Wellington Auckland, Wellington $NZD Political power is held by a democratically elected government with general elections held every 3 years. 03

4 investing in new zealand Key Attractions in Investing in NZ Typically no capital gains on property sales No land /wealth tax or stamp duty on sale and purchase; Limited restrictions on overseas investments; Westminster style legal system; Torrens land titles register. The Current Investment Market Institutional and publicly listed investors may be prepared to part with previously tightly held properties; Strong preference from clients to treat with off market qualified potential customers; Current Investment Returns Table 1 presents the trend in investment property total returns over the last 20 years. Table 1: Investment Property Portfolio Total Returns Office Retail Industrial Last 12 months 11.0% 13.1% 11.5% Last 5 years 5.7% 6.8% 7.8% Last 10 years 10.7% 11.6% 11.8% Last 20 years 7.9% 11.1% 11.8% Portfolio returns have improved significantly over the last two years reflecting the improvement in underlying property market fundamentals. Vacancy rates and stabilised or started to decline, rents are increasing and yields have firmed. The underlying occupier market fundamentals remain sound; The inflow of money from New Zealand s Kiwi Saver and Australia s compulsory superannuation savings plan will provide institutions and fund managers with capital that is likely to underpin future demand for investment grade property in New Zealand. 04

5 general information on investment Acquisition Expenses Legal Fees Fees typically range between 0.8% and 1.2% of value and are negotiable. Stamp Duty None Agency Fees Agency fees vary with the size of the assignment. Typically agent fees vary from 4% to 5% for residential property and 1% - 2.5% for commercial / industrial depending on the size of the transaction. Agency fees are typically paid by the vendor, however, in certain circumstances the agent is paid by the purchaser. Market Practices Units of Measurement Areas are typically quoted in square metres (m2). Transaction Currency New Zealand Dollars (NZD) Leasing Principle Terms Leases of land in excess of 33 years are deemed to be subdivision for which planning permission is required. Security of Tenure No statutory right to renew tenancy but an option for renewal is usually given, similar to the tenancy term or multiple of strata terms. Basis of Rent Payment Quoted as per $ sm per annum which generally excludes operating expenses. Gross rents are typically quoted in Wellington and net rents in Auckland and elsewhere in New Zealand. Rent Payment Typically monthly in advance. Rent Reviews Typically 2 to 3 years to market, ratcheted to commencement rental or adjusted to CPI. Some leases contain predetermined set rental increases Security Deposits Generally two months gross rent. Car Park fee Car park lots are allocated to proprietors/tenants in non-residential developments usually at a fee and charged in monthly rental payment. Property Rates Rates are levied on the Landlord but payable by the tenant as an operating expense. Service & Maintenance Charges Payable by tenant for provision of services to common areas such as air-conditioning during office hours, security, building maintenance including water and electricity, insurance for public and fire risk, building repairs and management fees. Repairs & Maintenance, Utilities & Insurance Coverage Tenants responsible for all repairs and maintenance, utilities and insurance coverage pertaining to the tenanted premises, while the landlord is responsible for the common areas. Lease Disposal Generally, subletting and assignment are allowed but landlord s permission must be granted. Agent Fees Typically range between 10% and 20% of the gross annual rent

6 Sale & Purchase Principle Terms Standard sale and purchase agreements approved by the Auckland District Law Society. Option to purchase to be agreed between parties with payment of a non-refundable deposit. Typical settlement period for residential properties takes three to five weeks and for non-residential properties about one to three months. Basis of Sale Sale of the property is based on the rights as defined on the certificate of title and the sale and purchase agreement. Acquisition Expenses Refer to Acquisition Expenses. Financing Loans can be obtained from banks and financial institutions at up to 80% of valuation or sale price, whichever is lower, for residential properties, and typically 50% to 75% for non residential properties. Foreign Investment Policy Incentives The major incentive is investing in an open deregulated economy. New Zealand has no payroll, wealth, and capital gain taxes, which lowers the operating costs. Foreign Exchange Controls and Repatriation of Funds There is no exchange control on the movement of capital and profits in and out of New Zealand There is also no restriction on repatriation of profits. Foreign investors require OIO approval for investments above $100 million or if the investment is in sensitive land or special land. Establishing an Investment Vehicle Modes of Entry Government approval is not required for foreigners to do business in New Zealand and 100% foreign ownership is freely permitted. The common vehicles are: Sole Proprietorship Partnership Joint Venture Incorporated Company Subsidiary or branch company Foreign Representative Offices Registration and Licensing Requirements Generally no fixed requirements for local equity participation and no restrictions as to the type of business organisation. All companies must be registered with the Registrar of Companies. Timescale and Cost Time taken to incorporate a company is usually one to two weeks. Typical costs involved are the minimum authorised and paid up capital of NZD1 and NZD1 respectively, incorporation forms, Memorandum and Articles of Association, professional fees and other expenses. Property Ownership & Tenure Types of Ownership/Tenure Land ownership is under the Torrens System or title by registration. Registers are kept by the Government and copies of titles are available online. The majority of transfers and other dealings in property are registered and upon registration of a transfer the buyer is said to have a title to the property which is indefeasible. Different types of land title that can be acquired are: Freehold title to individual parcels of land, including improvements on the land. Leasehold title, a right to exclusive possession and use of the land for the term of the lease. Strata and unit titles that relate to commercial units and medium to high density residential developments - i.e. home units, condominiums, flats and townhouses. Foreign Ownership Restrictions include the requirement for Overseas Investment Commission (OIC) approval is required for an overseas person to acquire or take more than a 25% stake in: Properties or businesses worth more than NZD50 million. Land over five hectares and/or worth more than NZD10 million. Land on most offshore islands. 06

7 Regulatory Framework Development & Buildings Controls The local authorities (city, district, and regional councils) control planning and development within New Zealand. The appropriate authority issues a District Plan which provides detailed construction, development and subdivision regulations. Resource Consent must be obtained prior to any construction, development or subdivision work commencing (Resource Management Act). Planning regulations vary among local authorities and are subject to revision every five years. Building Consent must be obtained prior to the commencement of any construction work. Development Charge Local authority charge for each resource consent issued. The charge varies with each council. In addition, developers may have to pay the council a contribution for infrastructure costs associated with the subdivision of any title. This is likely to be a percentage of value and/or a fixed charge per title created. Taxation Corporate Tax Resident entities are taxed annually on adjusted net profits less capital allowances. Profits include changes in value on properties held as investments. The corporate income tax rate is 33%. Non-residents withholding tax rate range from 15% to 30% depending on the type of income earned. The withholding tax rates are reduced when the non-resident is a taxpayer with which New Zealand has a double tax agreement. Personal Tax Personal income tax for residents is levied on a graduated scale ranging from 19.5% to 39% where the first NZD38,000 of an individual s chargeable income will be taxed at 19.5%. For income between NZD38,000 and NZD60,000, tax rate is 33% and for income at NZD60,000, tax rate is 39%. A person is deemed to be a resident for tax purposes if they are in the country for 183 days in any 12-month period of the tax year. Capital Gains Tax There is no capital gains tax in New Zealand for sale of any real property except for individuals or other entities who are traders in property. The capital gain, if applicable, is taxed as income in the year in the sale occurs. Value Added Tax/Goods and Services Tax The Goods and Services Tax (GST) is a tax levied on the sale of goods and services in New Zealand and on goods imported into New Zealand. GST is charged at 15% on the supply of most goods and services in New Zealand. The sale or lease of a residential property in New Zealand and certain financial activities are exempt from GST. Estate Duty None Property Tax The local authorities (city, district, and regional councils) levy property taxes on all property. The taxes are levied using capital value or land value systems. The system used varies among local authorities. The rate in the dollar levied on the property also varies with each local authority. Capital value and land value rating systems use the value of each individual property as set by the valuers contracted by the local authority to assess the rating value for all properties in their area. 07

8 new zealand economic trends The economy experienced significant reforms during the late 1980s and 1990s and has become one of the more open economies in the world with few restrictions on imports and exports. The economy is export led with key exports focused on agriculture, horticulture, forestry, fishing, and tourism sectors. Our key trading partners include Australia, China, United States of America, Japan, Britain and Korea. The National led coalition government was re-elected into power in 2011 for another three year term. Their current focus is to reduce government spending and control public debt. Key government strategies include: Fiscal austerity by reducing the size of the public service and restructuring the welfare system; Increased investment in infrastructure including the main highway system and subsidising the development of ultra-fast broad band; and Partly privatising state assets by selling minority stakes in the electricity generation sector, the national airline (Air New Zealand) and Solid Energy (State owned coal mining company) New Zealand s economy experienced a mild recession in the late 2000s and has subsequently started to recover and the recovery is continuing to gain momentum. Underlying growth is supported by increased construction activity, particularly in Auckland and Christchurch, and increased consumption. The adverse climatic conditions in the 2012/13 summer slowed growth in the first half of However, the rate of growth is now expected to increase. The relatively high value of the New Zealand dollar continues to impact on the export sector. National Statistics Last 12 Months Forecast Next 12 months GDP (year on year growth) 2.7% pa 2.9% pa Current Account (% of GDP) -4.3% -4.6% CPI (annual % change) 0.7% pa 1.4% pa Employment growth (% pa) 0.7% pa 2.8% pa Unemployment rate 6.4% 5.7% Retail sales (Increase % pa) 4.0% 4.5% Annual net migration gain 12,800 15,000 Official cash rate 2.5% 3.5% 90 day bank bills 2.6% 3.0% 10 Year Gvmt stock 4.7% 5.1% NZD / USD Cross rate

9 Figure 1 presents the annual growth in New Zealand s GDP between 1992 and 2013 together with the expected growth over the next 5 years. Figure 1: GDP Growth in New Zealand 8% 6% 4% 2% 0% -2% 4% 3% 2% 1% 0% -1% -4% -2% Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Annual Percentage Change in GDP Seasonally Adjusted Quarterly Change in GDP Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Quarterly % Change Annual GDP Growth Source: Statistics New Zealand Growth during the March 2013 quarter was higher than market expectations, increasing by 0.2%. The growth was concentrated in the construction sector and related services. In addition, the professional services sector continued to experience on-going growth. The outlook is for continued growth, however the rate of growth is expected to be erratic. In the short term, there is a number of opposing forces impacting on the economy and these drivers include: Lower than average interest rates are supporting the economic recovery, although there is building expectation of higher interest rates in the short to medium term; Building momentum in construction activity, particularly in Christchurch and Auckland; Households and businesses remain relatively cautious and are expected to continue to deleverage their balance sheets which will constrain consumption led growth; The high relative value of the New Zealand dollar is continuing to offset some of the gains in commodity prices. In September 2013, Fonterra updated its forecast of the farm gate milk price for the 2013/14 season to $8.30/kg of milk solids, their previous forecast was $7.80/kg; Government s fiscal strategy of reduced central government expenditure is tempering potential growth; and The global outlook remains uncertain although it appears growth in the United States is building momentum whilst the outlook in Europe is becoming uncertain and Asian markets are consolidating. 09

10 auckland economic trends Auckland has a number of key economic drivers. These include activity generated as a consequence of population growth, tourism, manufacturing and finance and business services. Auckland region experienced the second fastest growth in the June 2013 year (behind Canterbury). The region s unemployment rate fell and employment growth guest accommodation nights increased over the June quarter. Auckland is one of the fastest growing cities in Australasia. The on-going population growth in the region will continue to generate growth in economic activity over the short to medium term. Auckland currently requires between 9,000 and 11,000 new dwellings every year to cater for the underlying demand generated by population growth. Development activity is recovering from the lows of the last 5 years and contributing to the lift in economic activity. Pressures within the housing market including, a shortage in the increase in supply relative to the growth in demand, has resulted in increased house prices and rents. Increasing house prices has helped to improve consumer confidence and underpin retail sales growth. Labour market conditions continued to improve and the expectation is that Auckland will experience growth in the number of people employed, a falling unemployment rate, and modest lift in wages which will also underpin the region s slow recovery. Auckland unlike the rest of New Zealand has continued to benefit from positive net overseas migration which has helped underpin the region s economic activity. The expectation is that Auckland will continue to grow at a rate at least as fast as the national average over the short to medium term driven, in part, by the expected increased volume of construction activity. In summary, New Zealand and Auckland have weathered the global financial crisis better than a large number of countries. Although there was a mild recession in the late 2000s, the economy has largely recovered and is expected to continue to expand over the short to medium term. Key Auckland Statistics Key Population Statistics Population -4.6% As a % of national population 1.4% pa Productivity per Capita Population growth rate 1.6% pa Regional economic activity Growth over the last year 2.7% pa Share of national GDP 31% Average growth 2013 to % pa Labour Market Employment growth 2.8% pa Unemployment rate 6.7% 10

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12 auckland office market Auckland has a small office building investment market which like a number of overseas markets experienced a down turn in returns post the global financial crisis. The market has subsequently experienced a slow gradual recovery. Markets fundamentals are sound and driven by an improvement in local economic conditions demand for office space has increased over the last four years which has resulted in a turnaround in market returns to investors. We expect this trend to continue in the short to medium term. Overview Auckland s office market is centred on the CBD which has a total 1.3 million square metres of office space, has a total value of approximately $7.7 billion NZD and approximately 10% is prime quality. There are a number of other significant nodes outside the CBD including Fringe City (0.6 million square metres), the Southern Corridor (0.2 million square metres) and North Shore (0.4 million square metres). These suburban locations have grown in size over the last two decades providing a lower cost alternative to the CBD. The office market experienced a significant cycle during the 2000s. The office market peaked in late 2008 having experienced strong rental growth, low vacancies and a surge in development activity. Over the last six years the market has undergone a significant adjustment and has now been recovering over the last two years with declining vacancies, positive net absorption of office space, and improving investment returns. The office market is past the bottom of the current cycle with lower rents and higher vacancy rates fully factored into current values. Improving market fundamentals should result in an increase in returns from this sector of the market over the next five years provided New Zealand s economy continues to its expected recovery from the global financial crisis. Summary Stock Current Next 12 Months CBD Total (m 2 ) 1.3 million m million m 2 CBD Prime (m 2 ) 0.2 million m million m 2 Suburban (m 2 ) 1.2 million m million m 2 Rents (Net $NZD psm per annum) Current Next 12 Months CBD Prime $525 - $575 psm up CBD A Grade $400 - $475 psm flat Suburban A Grade $325 - $375 psm flat Supply / Demand Balance Current Next 12 Months Vacancy Rate - CBD 9.9% flat Vacancy Rate Suburban 12.5% flat Net Absorption CBD 5,000m 2 pa 20,000 m 2 pa Net Absorption - Suburban 5,000m 2 pa 10,000 m 2 pa Development Activity CBD 0 m 2 0 m 2 Development Activity - Suburban 0 m 2 13,000 m 2 Investment Returns Current Next 12 Months Yields - Prime CBD 6.5%-7.5% 6.5%-7.5% Yield - Suburban A Grade 7.0%-8.0% 7.0%-8.0% Total Returns - Office 11.0% 12.0% 12

13 Supply / Demand Balance Demand for office space has increased with the net uptake of space within the CBD totalling over 62,000 square metres since the beginning of 2011 or approximately 6% of the total stock. Figure 2 presents the trend in net annual CBD office space absorption between 1992 and Figure 2: CBD Office Space Net Absorption 120, ,000 80,000 60,000 40,000 20, ,000-40,000-60,000-80,000 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Net Annual Absorption (m2 per Annum) Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Source: Livingston & Associates Ltd Demand for office space within the CBD decreased in the six months ended March This resulted in an increase in CBD vacancy rates. Anecdotal evidence suggests that the rate of net absorption is likely to be positive over the balance of 2013 as a result of positive employment growth. The majority of the vacant space is concentrated in B and C grade buildings while the prime quality building vacancy rate has increased over the last four years, it is still less than 6%. Table 1 presents our estimates of the CBD vacancy rates by quality. The level of office building construction activity declined since the peak in the market in There is one building under construction and a significant refurbishment underway in the CBD. These are: The 18,000 square metre ASB Head Office currently being built by Kiwi Income Property Trust. This is due for completion in the second half of 2013 and is located on the fringe of the CBD in the Western Reclamation precinct; and The ANZ Tower, Albert Street is currently being refurbished for ANZ Bank and will be progressively occupied during Combined, these two buildings will add another 38,000 square metres of space during 2013, which is equivalent to 3% of the total office stock. Although the space being redeveloped is fully leased, the space vacated by ANZ and ASB will increase the amount of vacant A and B grade stock in the CBD. The gradual decline in vacancy rates placed upward pressure on rents in some sectors of the market. 13

14 Rental Growth CBD office rents have past the bottom of the current cycle with prime rents are starting to increase. Figure 3 presents the trend in Prime CBD office building Rents and vacancy rates. Figure 3: CBD Office Rental Trends $600 $500 $400 $300 $200 $100 $0 Jun-88 Jun-89 Jun-90 CBD Net Effective Rental Indices ($ psm) Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Source: Livingston & Associates Ltd Prime A Grade Prime net effective rentals remained unchanged over the June 2013 year while A grade rents increased over the last six months by approximately $10 per square metre. Prime office space remains under pressure with falling amounts of vacant space available to tenants. The level of incentive being offered in the market has declined over the last year with incentives currently worth between 1 month per year of lease on a 9 year term for prime space and more attractive deals available for secondary quality office space. Prime rents have started to increase as a result of increased demand and limited availability of vacant space for lease. In addition AMP Office Trust current refurbishment of the ANZ Centre for the ANZ bank has removed a significant amount of space from the market. 14

15 Investment Market Demand for well leased office buildings remains strong. Investors are focused on the underlying investment fundamentals in any potential sale with a desire for income yield. The total value of the office investment market in Auckland (CBD and non-cbd buildings combined) is between $7.0 and $8.0 billion. Figure 4 presents the trend in the number of office building sales with values in excess of $2 million NZD. Figure 4: The Volume of Office Building Sales (CBD and non-cbd buildings Combined) Total Value of Sales ($ Million) $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $ Number of Sales $ Total value Number of Sales (YTD) Source: PropertyIQ The volume of office building sales peaked in 2004 and again in 2007 and has subsequently declined. There were over 40 office building sales in 2012 for a total value of $420 million (NZD). The volume of sales during 2012 was slightly lower than the long term average. The year to date total for sales during 2013 is likely to change significantly. This is approximately 34% of the volume at the peak of the market in The largest sales were 135 Albert Street which sold for $104 million in 2012 and Number 1 Queens Street for $103 million in the first half of Office building yields have fallen with the improvement in market fundamentals, increased buyer demand and low interest rates. Private investors with significant capital are the main purchaser group although there is increased interest from overseas investors. Recent increases in interest rates may place some upward pressure on yields in the short to medium term. The underlying demand for office space should increase in the short to medium term driven by increased economic activity and employment growth. The rate of growth is likely to be erratic, reflecting the uncertainty of both world and local economic outcomes. All that aside, growth in tenant demand combined with limited development activity is likely to result in a decline in vacancy rates in the medium term resulting in improved investor returns. 15

16 auckland industrial market Auckland s industrial investment market has provided good returns over the last year and investors with steady income yields. The underlying market fundamentals continue to improve with increased demand for space, falling vacancy rates, and with upward pressure prime quality building rentals. The industrial sector is continuing to attract robust demand from investors chasing income yields from well leased buildings. The top end of the market is dominated by a limited number of domestic investors. Overview Auckland s industrial market is centred on South Auckland (Mt Wellington to Wiri), has a total of 9.5 million square metres of space (approximately 20% is prime quality) and a total value of approximately $9 billion NZD. The market experienced significant growth over the last decade as demand particularly from the logistics sector drove the development of modern large floor plate high stud premises close to key transport nodes to improve their productivity. The increased development activity resulted in the rapid growth in industrial nodes such as East Tamaki and the Airport Precinct. The rate of growth in stock peaked in 2008 and has subsequently fallen away as Auckland s economy adjusted to the impact and uncertainty associated with the global financial crisis. The industrial market experienced a significant cycle during the 2000s. The market peaked in late 2008 having experienced strong rental growth, low vacancies and a surge in development activity over the previous five years (2003 to 2008). Summary Stock Current Next 12 Months Total (m 2 ) 9.5million m 2 up Rents (Net $NZD psm per annum) Current Next 12 Months Prime (warehouse component) $90 to $115 psm up Secondary (warehouse component) $75 to $90 psm flat/down Supply / Demand Balance Current Next 12 Months Vacancy Rate 5.4% down Net Absorption 120,000m 2 pa up Development Activity 150,000 m 2 pa up Investment Returns Current Next 12 Months Yields - Prime 7.0%-7.75% flat Yield - Secondary 7.5% - 8.5% flat Total Returns - Industrial Portfolio 11.5% flat Over the last five years the market has undergone a period of adjustment and has now recovered and is past the bottom of the current cycle. The current level of rents and vacancy rates are fully factored into values and any improvement in the market should be reflected in value growth. The steady improvement in market fundamentals should resulted in an increase in investment returns from the industrial sector over the next five years provided New Zealand s economy continues with its expected recovery from the global financial crisis. 16

17 Supply / Demand Balance Demand for space within the industrial market has improved over the last year and as a consequence vacancy rates have started to decline. Figure 5 presents the trend in the industrial building vacancy rate and volume of new industrial building consents. Figure 5: Industrial Building Vacancy Rates and Building Consent Activity 600,000 12% Annual Area of New Industrial Building Consents (m2 pa) 500, , , , , % 8% 6% 4% 2% 0% Jun-00 Jun-01 Jun-02 Jun-03 Industrial Building Vacancy Rate Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Source: Livingston & Associates Ltd New Building Consents (Floor Area) Vacancy Rate The level of new industrial building activity fell between June 2009 and June 2010 years and vacancy rates peaked in June Subsequently demand for space improved as a result of steady growth in Auckland s regional economy whilst the rate of growth in new stock has only recently started to increase. Goodman Group (38,400 square metres in four buildings), Fisher and Paykel (31,000 square metres of space for owner occupation), and Auckland International Airport Ltd (15,200 square metres in 3 buildings) dominate current development activity. These three organisations are likely to account for approximately two thirds of all development activity in

18 Rental Growth The industrial occupier market is at or past the bottom of the current cycle with improving demand in most precincts. Table 2 presents the trend in industrial building rents and vacancy rates. Table 2: Industrial Rents and Vacancy Rates Prime Space July 2013 June 2013 Vacancy Rate Office Component Warehouse Component Office Component Warehouse Component Prime Quality Space North Harbour / Albany 6.8% $220 $260 $105 - $125 $180 - $235 $95 - $120 Mt Wellington/Penrose 4.1% $190 - $225 $100 - $125 $190 - $235 $100 - $110 Airport precinct 6.1% $185 - $235 $95 - $110 $190 - $220 $90 - $100 East Tamaki 4.0% $180 - $220 $95 - $110 $190 - $230 $85 - $110 Wiri 4.2% $175 - $210 $90 - $105 $190 - $210 $90 - $100 Demand for prime space has continued to improve in most precincts over the last year. Net effective rents have consolidated and are likely to start to increase in locations with low vacancy rates. Whilst rents for prime space are likely to improve over the next year, a surplus of secondary quality space has created a supply/ demand imbalance which has resulted in landlords competing for tenants on price. 18

19 Investment Market Demand for well leased industrial buildings remains strong. Investors are focused on the underlying investment fundamentals in any potential purchase with a desire for strong income yield. Figure 6 presents the trend in the number of industrial building sales with values in excess of $2 million between 1995 and Figure 6: The Volume of Industrial Building Sales Total Value of all Sales over $2 Million $1,200 $1,000 $800 $600 $400 $ Number of Sales over $2 Million $ Source: PropertyIQ Total Value of Sales` Number of Sales 19

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21 retail market Auckland s retail property market is typical of large metropolitan centres in Australasia with the majority of the quality retail space located in shopping centres and large format retail outlets. Other key shopping areas include Queen Street in the CBD and Newmarket on the fringe of the central city area. Auckland has approximately 3 million square metres of retail space. The retail sector has experienced challenging times since the start of the global financial crisis in Retailers have struggled to maintain turnover whilst their margins have been eroded by intense competition. Households have been more conservative with their spending and choosing to reduce debt and consuming less. These trends have had an impact on the ability of landlords to maintain rents at 2007/2008 levels. Recent market observations include: Rental levels have dropped by 10% to15% since the peak in the market in late 2007; Retail sales have increased slowly for most store types, however retailers margins remain under pressure; and Strong investor demand exists for well leased retail properties especially lower value buildings and yields have declined in recent times reflecting the strength of demand for investments. Figure 7 presents the number of retail property sales in Auckland during the June 2013 year by sale price. Summary Retail Property Sales Activity Last year The total value of retail property sales in the June 2013 Year $780 m The number of retail property sales in the June 2013 Year 480 Capitalisation rates 5.0% to 8.0% Retail Property Portfolio Returns & vacancy Rates Last year Average annual return 13.1% Capital Appreciation 4.6% Investment yield 8.5% Shopping Centre & Large Format Retail Vacancy Rate 2.0% Economic Drivers Last year Yields - Prime 7.0%-7.75% Yield - Secondary 7.5% - 8.5% Total Returns - Industrial Portfolio 11.5% Population Growth Auckland Region 1.6% pa Retail sales growth 4.0% Consumer Confidence Positive Regional Economic Growth Rate 2.7% pa 21

22 Figure 7: Auckland s Retail Property Sales June 2013 Year Number of Sales Less than $0.5 m $0.5m to $1m $1m to $2m $2m to $3m $3m to $4m $4m to $5m Over $5m Source: PropertyIQ During the June 2013 year there were 480 retail properties sold in Auckland and 64% sold for less than $1 million NZD and 4% (18 properties) for more than $5 million NZD. Key investors in Auckland s institutional investment market include: Westfield owns a number of shopping centres in Auckland; AMP Capital Investors Owns a limited number of shopping centres in Auckland and has recently being selling down its portfolio; Kiwi Income Property Group owns the Sylvia Park Shopping Centre and recently purchased Lynn Mall off AMP Capital Investors; DNZ Funds Ltd owns a number of large format retail centres in Auckland including the Mt Wellington Shopping Centre; and Argosy Property Limited owns a number of bulk retail centres in Auckland including Waitakere and Albany Mega Centres as well as Ti Rakau Drive bulk retail centre. 22

23 Market Drivers The retail sector has been through a period of limited growth over the last 5 years. Improving consumer confidence combined with the slow gradual recovery of the local economy should assist in underpinning steady retail sales growth and support retailers viability. Undoubtedly, there will be winners and losers in this sector. Retailers will need to be nimble and responsive to consumer demands as households try to maximise the utility from their budgets. Figure 8 presents the trend in Auckland s retail sales growth and consumer confidence between 2004 and Figure 8: Auckland Retail Sales Growth and Consumer Confidence Consumer Confidence % 20% 15% 10% 5% 0% -5% Retail sales Growth (% Change from the same quarter in the previous year) 80-10% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Source: Statistics New Zealand Consumer Confidence Retail Sales There has been a broad upswing in consumer confidence over the last quarter with all regions recording a positive trend in confidence. The continued recovery in consumer confidence should support retail sales in the future. Retail sales are forecast to increase between 2.5% and 4.0% per annum over the next five years. 23

24 Figure 9 presents the annual percentage change in the number of people employed, year on year growth in Auckland s regional economic activity and annual growth in retail sales. Figure 9: Regional Economic Activity, Employment Growth and Retail Sales 20% 15% 10% 5% 0% -5% -10% Jun-00 Jun-01 Jun-02 Annual % Growth (% pa) Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Source: Statistics New Zealand and ANZ Number Employed Regional Economic Activity Retail Sales Growth Auckland like the rest of the country is expected to experience a gradual recovery in economic conditions over the next two to three years. This will be reflected in a steady increase in retail sales which should assist in underpinning the fundamentals associated with the retail property market. 24

25 residential property market Auckland is New Zealand s largest residential property market. Over the last ten years Auckland s market can be characterised as having supply side shortfall relative to the growth in demand. This is a result of on-going population growth, strong inward overseas migration, inefficient construction sector and planning controls which have not allow the market to quickly respond to changes in demand. These trends combined with growth in the availability of credit, loose lending controls and historically low interest rates led to significant growth in values over the last decade and a decline in housing affordability. Table 3 presents Auckland metropolitan areas key residential housing market metrics. Summary Key Auckland Market Metrics Last year Number of dwellings 470,000 dwellings Home ownership rate 63.8% Median sale price $618,000 Private rental market 29.5% Social housing sector 6.7% Median rental rate $475 per week Typical investor yield 3.5% to 4.5% net Long term price appreciation 6.8% per annum Table 3: Auckland Metropolitan Housing Market - Key Housing Market Metrics Total Stock June 2013 Dwellings Ave Value Total ($ billion) Dwellings Ave Value Total ($ billion) Standalone dwellings 360,000 $675,000 $ ,200 $568,000 $14.30 Multi-unit dwellings (inc. apartments) 110,000 $435,000 $ ,200 $398,000 $3.30 Total 470,000 $618,000 $ ,400 $526,000 $

26 Figure 10 presents the trend in the value of houses in Auckland between 1989 and 2013 along with the annual rate of value growth. Figure 10: Auckland Dwelling Values 1989 to % % % 20% 10% 0% % % Jun-89 Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 House Price Index Annual % Change in House Prices Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Source: Property IQ House Price Index (Dec 89 = 1000) Annual % Change Median sale prices in Auckland are now over 10% higher than at the peak of the previous cycle in The recovery in values is a result of a number of factors including: Lower than average mortgage interest rates; Increased consumer and labour confidence; The recovery house prices has encouraged buyers to enter the market whereas before they were waiting for signs of a recovery in house prices; and Housing is a very large part of New Zealand s economy. New Zealand s total stock of housing is currently valued at approximately $685 billion NZD and forms the largest component of the wealth of New Zealanders. Households spend a significant and growing share of their income on housing and the quality of the home environment is considered a central element of family stability and social cohesion. New Zealand s housing market is dominated by owner occupiers, and the majority of the rental stock is provided by the private sector. The growth in new supply has consistently been lower than the projected growth in demand. 1 The accommodation supplement is paid to approximately 65% of all renter households at an annual cost of over $1 billion per annum. 26

27 The residential investment sector is dominated by small investors, typically owning between 1 and 5 dwellings. Properties are leased to tenants under the Residential Tenancies Act on short term agreements. Median rents for a three bedroom standalone dwelling is approximately $475 per week which would provide an investor with a 4.5% rental yield. The public sector provides a small proportion of the total stock to households with severe affordability constraints and/or social issues. In addition central government provides income support to households struggling to pay their housing costs via the accommodation supplement 1. Auckland Council is responsible for establishing the planning guidelines governing residential development within the city. Their current policy of urban containment and intensification of the existing metropolitan area has attracted significant criticism from the development community suggesting it is one reason for declining housing affordability. Key Attractions to Investing in Housing in New Zealand Typically no capital gains tax No stamp duty of transfer taxes on sale/purchase or rental No land or wealth tax however local body taxes are levied on property Limited restriction on overseas investment in the housing market Westminster style legal system Torrens land title register Key current market issues include: Rate of new supply is continuing to fall short of the growth in demand; The availability of funds to developers (and the conditions associated with any lending) is limiting the ability of the market to respond to current demand for new dwellings; The restructuring of the development community post the peak in the current cycle has resulted in significantly fewer developers and builders in the market thus limiting the supply side capacity of the market; The affordability of housing costs to lower and middle income households continues to deteriorate; Recent escalation in rental costs at rates higher than income growth is impacting on renter affordability; and Regulatory reform has to date not had a significant impact on lower development costs. 27

28 rural property market Agriculture in New Zealand is the largest sector of the trade-able economy, contributing about two-thirds of exported goods. The New Zealand agricultural sector is unique as it is being the only developed country to be totally exposed to the international markets since subsidies, tax concessions and price supports were removed in the 1980s. Pastoral farming 2 is the major land use but there are increases in land area devoted to horticulture and forestry. Livestock is predominately grass-fed, but hay, silage, and other supplements maybe used in the winter months to make up for slower pasture growth. Land use patterns have changed over the last decade with a greater proportion of land used for dairying, forestry and horticulture. Table 4 provides some key market metrics. Rural Property Market Trends Farm sales volumes and values were higher during the first half of 2013 when compared to Table 5 presents the trend in farm values per hectare and per productive unit 3. Table 4: Rural Property Metrics Farm Type Production Livestock Numbers Number of Farms Dairy Sheep Beef 1.5 billion kgs of milk solids 0.4 million tonnes of sheep meat 0.6 million tonnes of beef 6 million cows 38 million sheep 4 million beef cattle Total Land Area (hectares) 12, million ha 13, million ha 13, million ha 2 Pastoral farming includes dairy, grazing and finishing farms. 3 Dairy farm prices are expressed as $ per kilogram of milk solids (MS) produced while grazing and finishing farms values are expressed as $ per stock unit (SU). 28

29 Table 5: Farm Value Trends June 2013 Median Sale Price per Hectare Median Sale Price per Unit Farm type Current Last Year 10 Year Average Current Last Year 10 Year Average Dairy Farms $31,700 $29,500 $29,200 $37.5 / kg MS $36 / kg MS $36 / kg MS Finishing farms $21,400 $21,300 $13,500 $980 / SU $960 / SU $660 / SU Grazing farms $14,200 $14,000 $14,900 $500 / SU $480 / SU $550 / SU Source: ANZ NB: Sales data is volatile and reflects those farms sold on relative thin sales volumes. There is a wide spread in regional prices within the different farm types which is not captured at a national level. The differences are associated with parameters which influence production such as contour, climate, location relative to markets and processors, and soils. Farm prices are influenced by a number of negative factors including: Farm gate prices these are expected to be lower over the next 12 months compared to 2012 (see comment on commodity prices listed below); Existing farmers looking to deleverage rather than buy more land to expand their farm operation; and Positive drivers supporting farm prices have included: Interest rates current low interest rates are supporting farm profitability at this stage on the cycle; Favourable climatic conditions over this year s winter and spring and assisting farmers recover from last year s drought; Offshore enquiry for agricultural land has increased which has lent some support for farm prices; and A lack of good quality farms available for sale. Increasing regulatory compliance costs combined with inflation of other inputs eroding farm profitability. For example, Fonterra s expected milk solids payout for the 2013/14 season is a record $8.30 per kilogram. This is a significant increase over the 2012/13 season and is likely to place upward pressure on both existing dairy farm values and on the value of farms which could be converted into dairying. 29

30 Commodity Prices Agricultural commodity prices are key driver of farm profitability and have a significant influence of farm prices. Table 6 presents the recent trend in commodity prices. Table 6: Key Commodity Price Trends Current Month Last Month Last Year Change Month/ Month Change Year/Year Oceania Dairy Prices (USD per tonne) Whole milk powder 4,907 4,656 2, % +84% Butter 3,700 3,834 2, % +30% Cheddar 4,435 4,727 3, % +47% Beef & Sheep Indicators ($ per kilogram) NZ bull beef (NZD/kg) % +1.5% NZ steer (NZD/kg) % +4.1% NZ lamb (NZD/kg) % -9.9% NZ wool (24-31 microns) % -12.9% Source: ANZ The dairy commodity market continues to rebalance with the global key drivers influencing prices including: The risk premium priced into global grain markets is being unwound as larger Northern hemisphere grain crops are harvested. This will create downward pressure on our rural export prices; High global dairy product prices reflect a slightly lower relative value of the New Zealand dollar and high dairy commodity prices. This is likely to be reflected in record dairy farm gate prices in the 2013/14 season; Milk supply has struggled to keep pace with the growth in demand in recent years. Higher prices currently being experienced are likely to lead to a supply side response over the next two to three years which should place some downward pressure on global dairy prices. Softer demand growth in Europe which is being partly offset set by increased demand from China. Lamb prices have stabilised with a shortage of supply likely to support farm gate prices. Wool prices have continued to decline due to the stronger New Zealand dollar and weaker in market prices. Recent commodity price trends suggest farm profitability will significantly improve for dairy farms over the next year and stabilise for sheep and beef units. 30

31 the team Doug Osborne Joint Managing Director Corporate Real Estate +64 (0) (0) dosborne@savills.co.nz Steven Dunlop Divisional Director +64 (0) (0) sdunlop@savills.co.nz Paddy Callesen Joint Managing Director Commercial Sales +64 (0) (0) pcallesen@savills.co.nz Bruce Webb Associate Director +64 (0) (0) bwebb@savills.co.nz Kevin Richards Senior Executive Capital Transaction +64 (0) (0) krichards@savills.co.nz Daniel Byrne Development Manager +64 (0) (0) dbyrne@savills.co.nz David Fraser Senior Valuer +64 (0) (0) dfraser@savills.co.nz 31

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