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New Zealand Research Report - June 2021 Snippets

Commercial and industrial investment property returns have surged to multi-year highs, according to the latest data release from MSCI. Record low interest rates have escalated the competition for higher yielding property assets leading to yield compression, lifting values and, in turn, total returns.

The latest data shows that total returns across the ‘all property’ category over the year to March 2021 reached 15.9%, the highest figure recorded since December 2007. The result was primarily driven by capital appreciation of 9.8%.

Safe haven assets lead the way Sectoral differences in total return figures highlight the strong preference that investors have shown for assets with more defensive characteristics when economic uncertainty and volatility is apparent. Industrial and Large Format Retail (LFR) are at the top of the list, but heavily contested.

Industrial – continues its strong run Strong demand and supply fundamentals underpin the industrial property sector. Competition for industrial assets from a range of buyers, such as high net worth individuals, syndicators and listed property companies has seen property values surge, lifting total returns to 21.8% over the year to March 2021, the highest total recorded since the inception of MSCI’s industrial index in 1994.

Large Format Retail – sees record returns The other standout performer over the year has been the LFR sector. Sharing many of the industrial sector’s defensive fundamentals, its appeal has been further bolstered by a significant increase in consumer spending which is underpinning tenant demand. The solid fundamentals have again attracted high levels of interest from a wide range of investors driving up capital values. Over the year to March, the sector has generated total returns of 22.4%, the highest recorded by MSCI.

Shopping Centres and Strip retail – facing headwinds The MSCI data shows shopping centre capital values declined by 5.1% over the year, resulting in total returns sitting at 1.8%. The lower returns recorded reflect the different trading environment in which the retail sub-sectors are operating. While returns are lower than other sectors at present, the result is an improvement for the sector with the rate of value decline slowing and total returns turning positive for the first time since June 2019. This suggests that investors see value in the sector, particularly for centres where future prospects are improving due to the economic recovery.

Office – sentiment improving Office returns have lifted over recent months registering total annual returns of 13.0% over the year to March 2021, up from 6.6% a year ago. The result provides a strong indication that investors have looked through the short-term disruption to the office market due to COVID-19 enforced changes in work practices.

Stride Property Group’s purchase of 46 Sale Street, Auckland CBD, for $152 million, equating to an initial yield of 5.2%, is a clear illustration of the confidence that the investment sector retains in the office sector, particularly for well located, high quality assets benefitting from strong tenant covenants.

Listed property valuations repeat the theme Property valuation gains have been a recurring theme within annual reports issued by listed property companies with March-year ends. Once again, however, portfolios with a heavy weighting towards defensive assets have seen the most substantial increases over the year.

Goodman Property has seen the largest increase, 17.3%, reflecting the high proportion of industrial property within its portfolio. Investore which invests exclusively within the LFR sector, saw a valuation lift of 15.5% over the year.

Office An increased focus on sustainability from both public and private sector office occupiers has seen demand for premises with certified green credentials lifting over recent years.

From 1st January 2021 all government agencies were mandated to ensure, when entering or renewing a lease collectively or individually and occupies 2,000 sqm or more and more than 25% of the building NLA, that the subject property has a minimum 4-star energy efficiency rating (5-star for new-build). Eke Panuku’s recent decision requires new commercial buildings to meet 5-star Green Star ratings for all new commercial buildings over 1000 sqm in town centres.

The influence which the sustainable development trend is having on the office market is illustrated in the latest Colliers’ Auckland CBD office vacancy survey. While overall prime grade vacancy at December 2020 stood at 6.8%, vacancy within Green Star rated buildings was just 3.8%.

The development sector is also responding to the shift, adding just under 50,000 sqm of Green Star rated buildings to the Auckland CBD’s inventory over the course of 2020.

Industrial Despite the disruption caused by COVID-19 enforced lockdowns, industrial development ramped up over the year to April 2021. Building consent approval was issued for 1,143,696 sqm of new industrial development across the country, up 16.6% on the total recorded a year prior, according to Stats NZ.

Building consent approval increased in 11 of 16 regions led by Manawatu-Whanganui where the total floor area consented rose by 329%. In the Bay of Plenty issuance rose by 102% to 135,816 sqm, a figure which has been surpassed once since 1991. South Island consents were up by 14.1% to 291,600 sqm with Canterbury accounting for 59.6% of the total.

Retail The March 2021 quarter showed more promising signs for the retail sector. The total value of retail sales increased by $648 million between the December 2020 and March 2021 quarters, with 10 of the 13 core industries recording greater sales values than the previous quarter. Sales volumes bounced back from a fall in the previous quarter with a total increase of 5.5% across the core industries.

When assessing the performance of retail within industries, the hardware, building and garden supplies industry was a standout with a total dollar value increase in sales of $144 million, the largest amongst core retail industries.

Looking at results across the country, 10 of the 16 regions had increased sales values compared to the previous quarter. Canterbury recorded the largest increase (2.3%), followed by Auckland and Waikato.

Find out more in the latest New Zealand Research Report at colliers.co.nz/research.

Asia Pacific Market Snapshot - Q1 2021 Snippets

Overview

Across the Asia Pacific region, property markets started the year on a strong note, with office, industrial and logistics assets driving the ongoing recovery.

In China, the busy first quarter saw end-users and investors, including foreign investors, closing major deals in key cities. There was a resurgence in investor interest in Hong Kong and Singapore, while Japan witnessed the completion of a number of commercial and residential transactions.

In Korea, low interest rates and liquidity continued to fuel demand for office space, a trend likely to persist as competition intensifies for a shrinking pool of assets, while Taiwan saw demand spike for commercial properties.

In Australia, a typically quiet quarter witnessed heightened activity in the office segment, while New Zealand’s property market, buoyed by policy changes, low interest rates and expectations of reopened borders, is gearing up for an active year.

In the region’s emerging markets, India saw healthy demand for residential and commercial assets, and investors remain bullish about the market’s medium to long-term prospects. Vietnam’s property sector is in the midst of a rebound supported by government reforms, while Indonesia’s property market is benefiting from a smooth rollout of vaccines and policy changes that should strengthen purchasing power, improve market confidence and encourage investment. Thailand is also witnessing higher levels of market activity, especially in the logistics, warehousing and industrial sectors, but a rebound in the hospitality sector will depend on the resumption of international travel.

In the Philippines, where the economy shrunk last year for the first time since 1998, the property market is

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Asia Pacific Market Snapshot Q1 2021 Snippets - continued

likely to pick up following the easing of quarantine restrictions and the deployment of vaccines.

Meanwhile, in Myanmar, the ongoing political turmoil will affect the near-term outlook, but the market is expected to retain its long-term growth potential, especially in the infrastructure and industrial segments.

Investors, end-users propel Chinese property market

Several transactions were closed in Q1 by end-users as well as domestic and foreign investors, encouraged by China’s economic recovery. Beijing saw more deals finalised in Q1 than in all of H2 2020, with more expected to close in the coming months. In Shanghai, where 11 deals were completed, end-users were active in the office sector while investors were keen on business parks. Chengdu and Xi’an performed well with eight deals finalised between them, and interest in office and retail properties is likely to remain high. Industrial and logistics assets continue to stand out in Shenzhen and Guangzhou.

An industrial-sized recovery in Hong Kong

Hong Kong’s property market extended its rebound in Q1, led by investor interest in industrial assets. Investors looking to capitalise on local demand will focus on defensive assets while those seeking long-term income will turn to subsectors such as logistics, cold storage facilities and data centres. In the residential segment, resilient prices and strong pent-up demand for small to mid-sized units are prompting developers to consider acquiring sites for new projects, as well as collective sales of old tenement blocks for redevelopment.

Japan property market sees sustained investor interest

Cross-border investors with a presence in Japan completed a number of deals across the logistics, residential and office sectors, despite a renewed state of emergency in major metro areas that dampened demand, especially in the hospitality sector. With investments in Japanese real estate showing few signs of slowing, fresh capital is expected to pursue logistics and residential opportunities in the coming months, as well as office assets at a more modest rate, particularly in major cities beyond the Greater Tokyo region. Liquidity-fueled office property boom continues in Korea

Transaction volumes and unit prices rose in tandem in Korea’s commercial property market, which continues to be propped up by low interest rates and ample liquidity. As border restrictions limit outbound investments, interest in domestic office space will remain high. Coupled with shrinking supply, this will drive top-quality asset prices even higher and push down cap rates. Interest from domestic as well as foreign investors is expected to spill over into logistics, hiking prices and depressing yields in the segment.

Industrial assets aid Singapore rebound

Amid optimism about the resumption of normal business activities, investors and private funds continued to acquire industrial properties. The Boustead Industrial Fund launch underlined the segment’s importance to the city-state’s property market, which also saw deals close in the commercial segment while activity in the residential sector accelerated further. With business sentiment steadily improving following vaccine rollouts, local and foreign investor interest in commercial and industrial properties is expected to grow, with retail leading the way.

Office segment drives revival in Australia

The office segment led the revitalisation of key Australian property markets in Q1. Sydney CBD occupancy rates rose to their highest level in 12 months as a growing number of workers returned to the office - a trend also seen in Melbourne as the Victorian government lifted restrictions on staff coming in to work. In Brisbane, the CBD office market outperformed all others nationwide last year with the lowest percentage increase in vacancies. A combination of factors, including a public sector-led return-to-office strategy, improving market sentiment and limited asset supply, will pave the way for an even more active Q2 and beyond in these markets.

Auckland

Investor sentiment is improving, buoyed by the start of New Zealand’s vaccine rollout and the prospect of a gradual reopening of the border. This, in concert with the low interest rate environment, has further bolstered demand for commercial property assets.