We look at the key trends in the New Zealand industrial property market in 2020 and what to expect in 2021
While the Covid-19 pandemic has caused disruption across New Zealand, the impact on the industrial property sector has been mitigated by a number of factors. Many manufacturing companies were classified as essential services and therefore permitted to continue to trade, during level three lockdowns, while demand for services such as storage and distribution increased. Subsequent to lockdowns, the solid backdrop has been enhanced by New Zealand's stronger than expected economic performance.
Demand fundamentals have been strongly supported by a rapid return to expansion within the manufacturing sector and growth in logistics service providers. New Zealand's PMI fell to a record low of 26 in April 2020. The index however returned to expansion in June and has remained in expansion territory through to the latest data output in October. The accelerated adoption of online shopping which Covid-19 lockdowns drove has seen a sharp increase in demand for space from the logistics sector. Looking ahead, the roll out of the government's multi-billion-dollar infrastructure programme will inject additional demand for industrial workspace.
Despite a slight easing in vacancy rates across Auckland, Wellington and a number of regional centres over recent months, it is likely, given current demand drivers, that vacancy rates are at, or close to peak levels. This means tight market conditions are likely to return. This has elicited a significant response from the development sector with building consent data released by Stats NZ for the year to October showing that the amount of new industrial floorspace consented reached new record highs in Waikato, Gisborne, Hawke's Bay and Southland.
High levels of development activity have elevated the demand for industrially zoned land which, in many centres, is in short supply. This is resulting in further upward pressure on land values, particularly within established precincts.
Steps taken by the government and Reserve Bank to stimulate the economy, particularly the easing of monetary policy and undertaking of a massive quantitative easing programme have cemented in place low interest rates for an extended period. This has stimulated investment activity in the industrial property sector with demand strongly underpinned by the defensive qualities that the sector is perceived to possess. High net wealth individuals, syndicators and property companies are all active in the market. Low interest rates have also increased the appetite of occupiers to investigate purchasing their own premises as borrowing costs, in some cases, having dipped below rental costs. In many cases, the market is currently constrained only by a shortage of prime assets being brought to market. After a short period of stable yields in early 2020 when investors took a more cautious approach, competition and purchasing intent has escalated, driving yield compression in most centres.
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