Commercial Market Commentary
The wider consensus in late 2010 is that the commercial property sector will continue in the same vein it has been since the latter half of 2009. There continues to be a wide gap between properties of varying quality and lease covenant. For example there is competition for sound investment properties with strong tenant covenant, quality improvements and longer weighted average lease terms, whilst less attractive assets tend to suffer in terms of market interest and achieved prices due to issues such as economic and physical obsolescence and poor occupancy arrangements. In general, net effective rents have decreased with increasing incentives being offered.
There is still demand for investment properties priced below $2,000,000 from smaller private investors particularly in the retail sector. Assets over $5,000,000 are less likely to meet market demand unless well located and leased, primarily due to the more limited number of buyers and continuing funding difficulties in the marketplace. On the other hand, larger well leased investment properties over $10mill in value and showing more attractive yields are again being sought after by syndicators in the retail and industrial sectors. The recent easing in fixed mortgage rates will assist investors in this market.
Overall however, sales volumes are currently low and buyer interest, in the main, has been dominated by private local investors. Owner occupiers have been actively purchasing small vacant properties. These buyers typically see a cyclical buying opportunity for long term gains, and relatively low interest rates have encouraged this activity.
The government’s May 2010 budget removed depreciation claims on buildings with only a partial offset by lowering income tax rates. Expectations for a general economic recovery have remained muted, with poor consumer confidence and rising unemployment persisting. Overall, the market is not expecting a recovery in property values over the short term, however the medium term outlook (say five years) is that a gradual recovery can be expected to occur.
Land values in general have eased although levels are still considered too high to support development given current rental levels and yields. While the supply of serviced commercial land is limited at present, the level of demand is also very subdued. There have been relatively few sales of block land with the majority of these having been offered under mortgagee sale conditions.
Property is not immune from economic forces and it is for this reason that we emphasise that advice should be taken at the time of any property investment decision.
Residential Market Commentary
Auckland’
s residential property market maintained an extraordinary prolonged period of growth in values, from late 2001 until mid 2007. After mid 2007, sales volumes dropped significantly, followed by a general decrease in values, particularly during the second half of 2008. The initial catalyst for this was the failure of several finance companies, which had an impact on the availability of credit, particularly for residential development.
Throughout 2008, the declining market sentiment was compounded by deteriorating economic conditions both locally and internationally, and as a result of these factors, potential buyers were content to wait and observe market trends as they developed. A significant proportion of those who were active in the market during this period were bargain hunters, attempting to take advantage of distressed vendors including developers. Consequently, some very low sales occurred during 2008 and in early 2009, although these were often attributable to situations where the vendor was under duress.
Further downward pressure on prices during 2009 was mitigated by the easing in monetary conditions including interest rates, to combat the credit crisis (and global recession), and this lessened the extent of the downturn. Our observations indicate that most Auckland City suburbs experienced an excess in demand over supply during the second half of 2009 which put upward pressure on prices, particularly on the fringes of the city which appeal to returning expats. This situation continued into early 2010, particularly in the fringe city suburbs.
More recently a substantial drop in residential sales activity has been widely reported in the media, with sales volumes having reduced to similar levels to 2008. In contrast to 2008 however, the market is not currently influenced by vendors who are under pressure to sell, and therefore, the impact on values has not been significant.
Apartment Market Commentary
2008 saw a significant slowdown in the CBD apartment market initiated by higher mortgage interest rates, the subsequent withdrawal of most investors, while sentiment in the market was not assisted by the collapse of a number of the Blue Chip group of companies. The difficult market conditions with low volumes of sales continued throughout the first half of 2009, although the latter half of 2009 through to the present time has seen a slight increase in market activity as a result of historically low mortgage interest rates and a cautious increase in business and consumer confidence. We are presently continuing to see low sale volumes and steady sale prices.
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