Commercial Property is Boxing Along

It’s sometimes said that the property sector in New Zealand is a cyclical industry – traditionally a seven-year cycle of growth followed by a downturn.

However, considering that the last such downturn was the Global Financial Crisis of 2008, it seems New Zealand is now 10 years into this current ‘seven-year cycle’. Naturally, this has many inside and outside the industry asking whether we are overdue for a sharp and nasty crash?

Connal Townsend, CEO of the NZ Property Council, doesn’t think so. In his view, there is not the slightest evidence suggesting that such a downturn is coming.

“We know from recent research we’ve done, that the commercial property sector is now the single largest industry in the country, even larger than manufacturing, agriculture and health,” he says.

“The property industry made a direct contribution to GDP of $29.8 billion or 13 per cent of total GDP in the 2007-2016 period. It also grew by $11.7 billion over that time, accounting for 16 per cent of the growth of the GDP over that period, more than double the growth of any other industry.

“Even we were surprised when we scoped it out and learned how it all stacks up,” he says.

In Connal’s words, the commercial property market continues to “box along”, with investment remaining strong given the number.

“In terms of the index that we’ve managed for the last few decades, we know that current results are still trending around the long-term average for composite returns. This is a clear indication that the industry is tracking well for the future.”

However, Connal says there are still subtle trends to consider:

Seismic Issues
While commercial property investments generally are doing well, Connal says there are quite strong variations between Wellington and Auckland in relation to earthquake issues.

“Christchurch is excluded from this measure for now because of the 2011 events, but in Wellington especially there is anxiety about seismic ratings, and a misunderstanding of what that means in regard to affected buildings,” he says.

“While there is certainly good stock in Wellington, there are basic concerns about whether it is all safe. We’re having to build up a whole new performance profile for them over the coming years.”

Sustainability
The NZ Green Building Council’s Greenstar rating is becoming the norm for new office builds.

“At the minimum, new builds are receiving 4-star ratings, and many are achieving 5-stars. This shows that good sustainability elements are not just becoming a trend – they are becoming the norm.”

Related to this is the growing prevalence of automatic office management technology; eg. controlling a property’s air-conditioning via a smartphone.

“Real technological smarts that can achieve these kinds of things are only just starting to appear in new local builds. New Zealand may be way behind global trends in this regard but again, it’s becoming the way of the world.

Reinventing Retail
Meanwhile, Connal says while retail has not performed as well in the last quarter, it is still growing solidly – with many reasons to be positive.

“There has been a great deal of concern out there about the perceived end of the retail shopping centre, with doom-sayers expecting the Internet and mobile shopping to bring an end to bricks-and-mortar retail. What we’ve actually seen is big successful shopping centres continuing to be as big and successful as they always were, if not more so.

Large shopping centres that are successful are reinventing themselves and creating ‘destination experiences’, essentially providing a boutique shopping experience that defies their large-scale format. Shopping becomes an experiential thing – with movies and restaurants alongside traditional stores – which is created by the shopping centre environment.”

Connal also notes the trend of retailers utilising smart technologies to build customer loyalty and create meaningful interaction.

“The Internet of Things is slowly permeating traditional retail culture in New Zealand..“The future looks positive, but retailers will have to be fleet of foot to deal with the changes that are going to keep coming.”

Industrial Strength
Finally, Connal points to the industrial sector as being a beacon for other sectors – especially retail – to look to for an example of reinvention.

“The industrial sector has really come into its own in recent times and is reinventing itself for the modern economy. Industrial properties are well placed to act as ‘logistics hubs’ that provide assets for servicing online shopping.”

“Auckland is a great example of a city that is starting to get it right by developing ‘nodes’ of industrial businesses. Some might call this urban sprawl, but really, it’s vital urban development.”

Connal says the Property Council is currently advocating for more property to be made available for industrial building and believes there is now genuine commitment to making sure there is adequate land for industrial property in the future.

“If you’re a substantial commercial developer and you don’t have any industrial property in your portfolio, you need your head read. It’s a reliable, well performing sector that underpins the economy,” he says.

While he remains positive about the future of investment in commercial property, Townsend acknowledges there is still work to be done if the current 10-year positive ‘cycle’ is going to continue.

“In terms of developing commercial property assets in big cities, dealing with the Resource Management Act (RMA) is of fundamental importance. We need to be clear on exactly where we want urban development to occur,” he says.

“As a nation, we massively under-invested in local infrastructure for such a long time, and we’re now reaping the consequences of that, so we need to start to think about future-proofing and not rule out options.”

In Connal’s view, by keeping focused on this principle will mean the commercial property industry won’t be going down for the count anytime soon.

Read this article and other stories from the country's leading investment and commercial minds in our free 24-page 2018 Commercial Property ThinkBook.