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Globalisation brings firmer yields

The more New Zealand is included on international investors’ lists of potential investment targets, the more likely yields are to firm.

Matt Tooman presented a brief comparison of yields this week in CB Richard Ellis’ Auckland Outlook.

He said New Zealand yields traditionally lagged 150-300 basis points behind key international property investment markets but, “given the growing acceptance of New Zealand as an investment destination, there appears ability for additional firming in yields from what we have seen over the past 3 years.

“However, a clear feature of recent investment activity, particularly from Australia, is showing that investors are prepared to pay aggressive but not silly prices.

“It pays to remember that Australian investors do not look at the New Zealand market in isolation, but compare that to their own & international markets.

“Therefore, if international markets have a change in yields, there is likely to be some adjustment in the New Zealand market. Where the opportunity exists is the potential for further improvement in the yield relativity between new Zealand & the world’s markets.”

Demand won’t match supply over next 4 years, says Moricz

On the local picture, CB Richard Ellis’ research chief, Zoltan Moricz, said demand would probably not be enough to absorb the expected increase in cbd & suburban office space over the next 4 years.

After 4 big supply years, 2003 was quiet. Mr Moricz said 115,000m² was planned to come on to the market by the end of 2005, and another 136,000m² by the end of 2008.

“Demand will probably not be enough to absorb it,” Mr Moricz said.

He said the present vacancy rate of 9.2% meant empty office space in the cbd plus suburbs amounted to 189,000m².

Recent takeup had been dominated by the Government & banking sectors, which between them had taken 29% of space. Property & business services and education took 11% each, finance & insurance, legal & accounting and telecommunication 7% each.

Mr Moricz expected overall vacancy to hover around 12% over the next 4 years, but for non-prime space it could be up at 15%.

Immediate demand will exceed supply, says MacCormick

James MacCormick listed 18 tenants occupying 78,500m² & wanting to move, and pointed to 64,500m² of space available up to the end of 2005 – not necessarily in the category or offering the floorplates they want.

The lack of quality space would lead to more renegotiation of leases and also offered an opportunity to refurbish B grade buildings. He said some of the larger tenants looking at moving might be faced with an Ernst & Young-style task, of refurbishing their existing premises to a significantly higher standard.

The need for a new tower, or shorter buildings with large floorplates, would boost East on Quay’s development chances on one side of the cbd, competing with Newcrest and Trans Tasman Properties on the Viaduct Harbour side.

Among the refurbishment opportunities are the BNZ Tower at 125 Queen St (soon to be vacant), the Simpson Grierson building on Albert St (the law firm is moving to Manson’s Roller Mill tower development) and the former Kensington Swan building at 22 Fanshawe St (that law firm has moved with accountants KPMG into Newcrest’s first Viaduct Harbour building).

Mr MacCormick predicted that:

The Roller Mill tower would be fully leased on completion (it’s at 80% now)
Britomart would get 2 anchor tenants out of other cbd buildings
2 more buildings would go up at East on Quay in the space of 2 years, and
one cbd building would be completely refurbished.

He also saw large chunks of cbd space coming back on the market through a decline in the education sector and as some of the apartment conversion proposals failed to materialise.

Related stories: Need for 3-4 star hotel rooms grows, says Tooman

Website: CB Richard Ellis Auckland market outlook

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