Investment in Wellington's central business district office market slowed dramatically last year, according to Colliers International's latest market indicators report.
This was in stark contrast to 2007 when major CBD office sales totalled more than $430 million, as seemingly inexhaustible supplies of capital fuelled the investment market. Unrelenting interest from institutions, offshore funds and investment companies compressed yields to new benchmark levels, which in some instances dropped below 6.5 per cent.
While there were a large number of buildings unofficially on the market last year, a disconnect in yield expectations emerged, reflecting a more prudent pricing of risk and making it difficult to match willing sellers and buyers.
Despite limited transactional evidence to conclude a softening in yields, various external influences have dampened the investment market. "In light of this, we estimate that prime yields have eased by 50 basis points from the benchmark levels achieved in 2007, while secondary yields have increased as much as 150 basis points for riskier, lower-grade assets," the report says.
Private equity, syndicates and high-net-worth individuals with access to funds began to resurface towards the end of 2008.
Anaro Investment Group, an Oamaru based syndicator, bought Sovereign House for $19.6m on a 7.93 per cent yield, while another syndicator, Oyster Property Group bought Eagle Technology House for $23m on a yield of 9.53 per cent.
Most recently, Robt. Jones Holdings has bought the former Public Trust Building on Lambton Quay from DNZ Property Group for $19m on an 8.46 per cent yield.
"Transactional volumes are forecast to remain low in the immediate future, particularly for high dollar value assets.
"However, with the yield gap (cost of debt versus initial yield) beginning to look comfortable, we expect interest from private capital and investment companies to continue this year, particularly for properties with secure cashflow.
"Yields for the most part are expected to stabilise this year at levels which reflect a sensible differential in terms of risk between prime and secondary assets. However, further softening, dependent on grade and locality remains a possibility as national and global economic uncertainties run their course."
Business growth and government expansion has, in recent years, fuelled Wellington's leasing market, creating the basis for low vacancy rates and rental growth, but signs of a softening in tenant demand are becoming apparent.
The credit crisis has led to a severe slowdown in the global economy, and New Zealand has not been immune. Tenants have grown increasingly cautious and a number of businesses that were considering moving last year are now re-evaluating their options.
Nevertheless, some tenants will move this year and next year, after committing to new office developments, most of which are located in the northern precincts of Wellington's CBD.
More than 90,000 square metres of new A-grade office space will be filled in the next three years, beginning with the Bank of New Zealand, which is moving at the end of this year to the Harbour Quays precinct.
The new six-storey BNZ development, totalling 18,700sq m is expected to house 1000 staff, who are located now in several buildings around the city.
New Zealand Customs Service will join the BNZ in early 2010, on completion of its new 6500sq m headquarters.
Late in 2010, Inland Revenue and the Civil Aviation Authority will move to 1 Featherston St, in the CBD's core precinct. Inland Revenue has secured 25,000sq m, while Civil Aviation Authority will move into 3015sq m.
About the same time, the Government Communications Security Bureau (GCSB) will move to Pipitea Plaza, a new purpose-built headquarters in Thorndon. The GCSB has signed a 12-year lease for 14,500sq m of A-grade space at the property, a joint venture between Wellington Tenths Trust, Equinox Group and Redwood Group.
The Wellington Company has signed up Telecom New Zealand for its latest project, Willis Central, due for completion in mid-2011.
Telecom will anchor the $100m development, taking 19,000sq m on a 12-year lease.
Telecom has also signed an agreement with Manson TCLM for a new headquarters in Auckland.
Similar to the Wellington development, the 30,000sq m development is intended to be five-star green-rated and have a campus feeling.
The $200 million project will consolidate more than 2500 employees from various properties across Auckland on one site when it is completed in late 2010.
The shift towards Thorndon and the waterfront was also evident in existing buildings, with new leases being signed. The Accident Compensation Corporation has leased 2927sq m at Laptop House in Waring Taylor St, while Marsh has leased 2236sq m at PricewaterhouseCoopers Tower on The Terrace.
Engineering and consultancy group Beca will move in the middle of the year to 3600sq m on a nine year lease at Aorangi House in Thorndon, while the New Zealand Institute of Chartered Accountants has secured 2555sq m at the Tower Building on Customhouse Quay for a term of nine years, four months.
"Activity over the short to medium term is expected to be limited, with easing employment growth and increasing tenant caution, contributing to the slowdown. The government, which has been a driving force in Wellington’s office market in recent years has signalled it wants to stem expansion of the public sector.
"Tenants are more inclined to forego relocation or expansion in tougher economic and financial times."
Click here to read the full report in PDF format.
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