A Billion Dollars Done...And More To Come
It’s been a big year for Colliers’ Capital Markets division - transacting a whopping $1.696 billion worth of deals in the 12 months to May 2016.
“This is a huge volume of sales that reflects an extremely buoyant commercial property market that is showing no signs of slowing down,” says Peter Herdson, National Director of Capital Markets for Colliers.
“It’s also a significant milestone for the team and reflects the team’s success, knowledge and strength around large commercial property transactions in New Zealand.”
The Capital Markets team – comprising Peter Herdson, John Goddard, Andrew Reed, John Green and Jason Seymour - has worked together as a team sharing equally in all remuneration for more than eight years, focusing on major office and retail capital transactions.
Notable sales in recent months include the Antipodean Supermarket Portfolio of 19 stores – which sold for $287 million, reflecting a blended yield of 6.37% – one of the largest deals in Colliers’ history.
“The supermarkets’ sale last year was the biggest portfolio offering of institutional grade supermarket properties in New Zealand, and one of the largest in the Asia Pacific region,” says Herdson.
“It was a particularly satisfying result given it was a true team effort involving a total of 10 Colliers International and Australasian offices in the marketing and negotiations.”
Capital Markets team Director John Goddard says this was followed two months later by the sale of three major Westfield shopping centres for an aggregate purchase price of $549 million.
“ASX-listed company Scentre Group sold the three shopping malls in Lower Hutt, Hamilton and Auckland, with the Ladstone Holdings group of companies acquiring Westfield Glenfield, while a fund managed by Stride Property Ltd, called Diversified NZ Property Fund Ltd, purchased Westfield Queensgate in Wellington and Westfield Chartwell in Hamilton - subject only to approval of the Overseas Investment Office.
“The portfolio had a combined net lettable area of 71,896 sqm and a passing income of about $18.7 million,” says Goddard.
The team’s other significant sales are:
• Shore City shopping centre for $90.15 million
• Datacom House in Auckland’s Wynyard Quarter for $86.2 million
• Manson TCLM’s recent development at 151 Victoria Street for $204 million
• 34 Shortland Street for $44.6 million and
• a 7,770 sqm shopping centre development at Westgate in Auckland (known as Zone 7) to property fund Kiwi Property for $82.5 million.
In addition, Colliers was involved in the sale of approximately 2.7 hectares in the Wynyard Quarter precinct to three different parties (residential, commercial and hotel), as well as the separate sale of a one hectare block of freehold in the same area for $60 million.
Furthermore the team thinks there’s no sign that the momentum in the market is nearing an end.
Typically, property cycles in New Zealand have lasted seven to 10 years, with varying degrees of severity when they change.
It is now nine years since the last boom.
But, as Colliers’ research shows – and Colliers’ directors are seeing ‘on the ground’ - we are now about to enter a new pattern of activity, rather than approaching a cyclical peak, Herdson says.
“We are far from the risks of an overheated or euphoric market.”
“An extended pattern of buoyant investment activity is likely to continue.”
Colliers International New Zealand brokers are already aware of more than $2 billion of commercial sales settling, or likely to settle, in 2016 with an individual price tag of $20 million or more.
“Given the buoyancy in property purchasing below $20 million, we expect that 2016 is likely to eclipse 2015 reaching close to $8 billion,” says Herdson.
And the Treasury’s Economic and Financial Overview 2016 – released in April – echoes this sentiment.
“The New Zealand economy has steadily recovered from the global financial crisis (GFC) despite further disruptions such as the Canterbury earthquakes and occasional periods of drought,” the report says.
“Growth is expected to pick up in the second half of 2016 and remain above trend for most of the latter part of the forecast.
“Stimulatory monetary policy conditions are expected to support domestic consumption and investment. Increases in the Government’s operating and capital allowances increase public consumption and non-market investment respectively. Unemployment falls as spare capacity in the economy declines.”
The Property Council New Zealand/IPD New Zealand Quarterly Property Index Q1 2016 results have also just been released showing commercial property is thriving, and this is facilitating these significant acquisitions, Goddard says.
“The results show a total annualised return of 13.9% for the year-ending March 2016 - above the 12.5% return to December 2015 and the ten-year average return of 9.9%.
“New Zealand property returns are at the highest level in the past eight years which is both indicative of the commercial property market’s strong performance and a good testament to further buoyancy in the year ahead.”
FAR FROM A DOWNTURN
Goddard says the demand for commercial property across all price levels will be spurned on by key investment factors.
“We are seeing continued support for purchasing activity due to domestic economic expansion, balanced property demand and supply fundamentals, asset appreciation from cash flows and unprecedented purchasing demand, debt-leveraging and positive debt to yield spreads, the rally in local investor activity and offshore purchasing demand for flagship assets.”
The Capital Markets team expands on these factors citing 10 key reasons, in collaboration with Colliers' research, as to why they believe we are far from a downturn:
• Global economic risks are well defined
• The Reserve Bank of New Zealand and credit agencies continue monitoring and mitigating risks for financial instability
• Investors are not overconfident or overcommitted
• Sales activity is justified on current economic and property fundamentals
• Asset values are appreciating modestly from positive cash flow and capital returns
• New Zealand yield levels are still higher than many major overseas markets
• The spread between debt costs and property returns will remain lucrative for longer
• There is limited political risk and high levels of transparency
• A positive demographic environment for commercial sales activity now and the future, and
• New Zealand is increasingly becoming a globally attractive, more liquid property market, increasing the depth in our transaction market.
ONSHORE VS OFFSHORE
Goddard says the balance between onshore and offshore purchasing activity normalised in New Zealand in 2015, with local purchasers dominating offshore purchasers.
“Typically offshore purchasing activity has been below 15% of overall value and below 10% of the number of sales, which was mirrored in the 2015 results.
Offshore investors continue to prefer investment in the office sector, albeit they have stepped up their position in the retail sector recently as opportunities have arisen, Goddard says.
“Instead, 2015 was the year of the listed property vehicles (LPVs) rather than offshore purchasers.
“LPVs accounted for $600 million of purchases from 13 sales compared to offshore purchasers for $435 million from 17 sales. Private local investors continued to dominate all categories.”
In terms of investment drivers - after property fundamentals and economic growth – asset appreciation was signalled as the third most important feature of a real estate market in the latest Colliers International Global Investor Sentiment survey, Goddard says.
“The key to the most recent uplift in values over the past few years has been the rise in cash flows from rent increases combined with firming cap rates.
“In a review of major cities in the US, Europe, Asia, Australia and New Zealand, prime average commercial office, retail and industrial yields in Auckland, Wellington and Christchurch were typically higher than many global counterparts.
“The ‘lower for longer’ inflation and interest rate environment, the weight of money chasing limited prime stock in New Zealand and the positive economic and property fundamentals, signal further yield firming, rising rents and asset appreciation.”
New Zealand could also capitalise on the growth and popularity of offshore investment into Australia, which will undoubtedly continue, Goddard says.
“Australia is now seen as a ‘must have exposure’ for those global property entities looking to expand into the Asia Pacific region.”
The dominance of local Australian institutional ownership, high incentives and thus lower effective returns as well as yield spreads similar to major gateway cities, indicates there is room for greater focus on other nearby ‘safe-haven’ markets, like New Zealand, Goddard says.
“Auckland in particular can benefit from Australian activity - primarily the likes of Sydney and Melbourne - being a gateway to New Zealand.
“Purchasing commercial property in New Zealand has already been given the ‘big tick of approval’ by recent offshore purchasers like GIC, PSP Investments,
Credit Suisse, Deka Immobilien, JP Morgan (formerly Aviva Investors) Morgan Stanleyand other offshore private investors,”
NEW ZEALAND’S HOTTEST SPOTS
Auckland continues to provide the lion’s share of sales activity in New Zealand, accounting for 37% of all commercial sales activity by number of transactions, Herdson says.
“This is a reflection of Auckland also claiming approximately a third of the population, economic activity, employment, retail spending and residential property sales.
“The aggregate value of Auckland’s commercial property sales in 2015 was the second highest recorded at $3.9 billion, representing 53% of national sales value.”
Wellington recorded its best ever year in 2015, reaching just over $1 billion of sales activity for the first time, Herdson says.
“There was a relatively even spread between the three main commercial sectors in Wellington, with the retail sector eclipsing previous years.”
Christchurch accounted for 14% of national sales turnover last year, with a total value of $752 million, Herdson says.
“Almost two- thirds of sales activity by value and the number of sales was in the industrial sector. Signalling the continuation of the Christchurch market recovery, the office sector had its best ever year with $132 million of sales.”
In Colliers International’s latest New Zealand Research Report, Colliers’ Director of Research and Consulting, Chris Dibble, says 2016 is already shaping up to be a memorable year.
“Population growth is boosting certain sectors of the economy and the outlook for growth is positive in many sectors including manufacturing, services and tourism. These features encourage strong property fundamentals.
“Adding to this market sentiment, purchasers will take comfort in the limited evidence that investors are overcommitted or hasty in their decision making.
“The Reserve Bank’s latest analysis of 21 registered banks in the financial stability review shows non-performing loans at a six-year low,” says Dibble.
“Our own confidence survey shows investors have cautiously modified their enthusiasm from last year’s record highs - from a net positive 31% in Q2-2015 to 27% in Q1-2016.”
The financial environment is a key consideration for many consumers, purchasers and businesses on whether to keep buying, investing or expanding, Dibble says.
“Currently, interest costs remain low, trending downwards in most countries since 2009.
“As a consequence the question on investors’ minds has been around where to find high yielding assets. Commercial real estate has been a compelling answer for many.”
Dibble says prices are rising as the gap between funding and returns remains lucrative, but investors are not being too bullish or careless in their decision making.
“Although investors are confident, they have moderated their sentiment slightly this year – increasing their levels of cautiousness in the past nine months.
“However, this has not deterred purchasers from exploring new markets, new sectors and new opportunities. Forecasts indicate that low interest rates are unlikely to rapidly change any time soon, fuelling asset price appreciation further.
The current high premium to net tangible asset (NTA) ratio in the listed sector would tend to further support the view that asset prices have not peaked.
“All the dots join to indicate an extended pattern of buoyant investment activity is likely to continue,” says Dibble.
And Colliers’ Capital Markets team certainly endorse these views, evidenced by their significant work in progress for the remainder of this year.
View full Colliers Portfolio site here.