TelferYoung (Auckland) Limited

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Auckland Newsletter - December 2009

17 December 2009

Welcome to the TelferYoung (Auckland) Limited December 2009 Newsletter

STAFF CHANGES

We have had two staff changes in Auckland with Mark Maginness replacing Regan Johns who left for his O.E and Ruth McKenzie is our new receptionist administration assistant. Mark is involved in commercial valuations with Lewis Esplin. He completed his B Prop Degree in 2008. The TelferYoung website provides a full list of our staff and the services we can offer you.

Mark Maginness	Ruth McKenzie

     

THE COMMERCIAL MARKET

We have been surprised at the strength of the commercial market over the past 12 month period. This has been particularly evident for small commercial investment properties that have sold readily at property yields little different to those that applied in 2008. Examples include:

Commercial properties have been selling by way of auction as a preferred method of sale. Auctions have proven particularly successful for small commercial investments where there has been an excess of buyers relative to the number of properties available.

A recent auction, however, signalled that a different pattern may be emerging, with a smaller number of buyers and a hardening market. We expect this may become more evident in 2010. There is the possibility of a softening in commercial property yields and lessening opportunities for rental increases.

The strong market demand that has been evident for smaller sized commercial and industrial investments has been substantially different to the pattern for larger properties, particularly over $5.0 million.

Institutional investors and funds have been net sellers of property in the past 12 months. Yields have softened and reports for commercial property show a continuing decline in asset values. This is scarcely surprising, particularly for the office market, where there has been a dearth of prospective tenants, with new buildings continuing to come on stream. Leasing incentives have become more common.

INCENTIVES

We have seen two distinct changes in the market over the past 12 months. The first is that tenants taking new leases expect rental holidays. The traditional one month for each year of the lease may be extending out to a longer period, and/or other forms of incentives such as fit-out contributions or cash payments may apply. We cannot see this position changing in the foreseeable future. The main focus of landlords will be to attract tenants on the best possible terms and to retain existing tenants.

We have noted a distinct ‘bargaining' strength change between landlords and tenants not seen since the 1990's. Some existing tenants in strong bargaining positions have been approaching landlords where there are three years or less remaining to their existing leases. They have been negotiating for immediate rental holidays and/or other incentives in return for a lease extension.

We would describe these approaches to landlords as "opportunistic" justified by falling retail turnover, recessionary economic conditions, and playing on the "fear factor" that a landlord would take a reduced rental income stream in the short term in exchange for a certainty of a more secure rental income stream into the future.

Strong tenants undoubtedly have good bargaining strength in this market. Few landlords would not entertain the possibility of some form of contribution by rental incentive or upgrading, to secure a sound tenant for a longer term. Whether this is realistic with say 3 years remaining of an existing lease term is questionable, as the economy may rebound as swiftly as it contracted. Markets can and do change rapidly. However, recovery in the property market inevitably lags the general economy. Rents in particular are unlikely to increase materially in the next 12 months, although some rents fixed two or more years ago may still be below the current market.

So what should a landlord or tenant do?

Each situation must be examined on its individual merits. We have had a number of approaches from landlords and tenants seeking our advice on the best course of action in this market. Each case has been different and often relates to the individual bargaining strengths of the parties or their aspirations for the future. We are well equipped to provide this property valuation advice, with twelve specialists in commercial and industrial property throughout the Auckland region.

We also have had inquiries from landlords and tenants looking to maximize their long term position. Often, the structure of the review terms within the lease are crucial to ensure that the aspirations of both parties are fairly measured, both in the initial negotiation phase and when the lease comes up for renewal or rent review over the next 3 - 6 years.

Landlords and tenants should discuss their future aspirations and work through any problems they may have during difficult economic times. It is a wise landlord who approaches his tenant well ahead of a rent review or renewal date. Neither party should be reticent to request a meeting with the other in an endeavour to solve any outstanding issues so that a mutually beneficial association continues into the future. Landlords do not want a surprise if a tenant leaves it until the last moment to advise they will vacate at the end of a lease. Equally, tenants do not want to be placed in a position where a landlord puts a tenant's business at risk by leasing to an alternative party. This is a time to work hard on good landlord-tenant relations.

WARLT

As a commercial property owner if you do not know what WARLT stands for, then perhaps you should. 

WARLT, or Weighted Average Remaining Lease Term, is one of the investment criteria that most lenders apply. Currently lenders appear to be putting more emphasis on this aspect of a commercial property loan application.  They want to know how long a lease has to run, if the property is multi tenanted and what is the weighted average term remaining of the combined leases. 

The strength of the tenant, the property's location, its age and the quality and nature of improvements all play a part in evaluating an investment. However all things being equal, lease terms then come into play.  A seven year lease with five years to run is going to be viewed more favourably than a seven year lease with two years to run.  Similarly, a new seven year lease would be considered better than one of three years with two rights of renewal of three years each. Multiple leases in the same property require a WARLT calculation. We have a calculator sheet that we can apply to the problem given the salient lease details.

The logic justifying an analysis of leases is simple.  In harder economic times there are potentially a greater number of lease terminations at lease expiry and the vacancy period is also likely to be longer, with fewer new tenants looking for accommodation.  In short, the risk increases. 

Mortgages on commercial property tend to be relatively short term and sometimes fall due at inconvenient times. 

If you need to renew your mortgage you might want to think about improving the security of the proposition you are offering so you are in a better position to obtain the level of borrowing needed.  One way of doing this is by improving the terms of the current lease, which will, of course, require negotiation with your tenant. 

To achieve the desired win/win situation, you are in a stronger position if your offer is supported by independent valuation advice. This will make it easier to show your tenant that the proposition is in their best interest.

The team at TelferYoung are happy to meet with you and discuss the various options of achieving this.

Evan Gamby.

Back issues of the newsletter can be obtained from TelferYoung (Auckland) Ltd
Phone: 379 8956
Fax: 309 5443
PO Box 5533
Auckland
www.telferyoung.com
email: telferyoung@auckland.telferyoung.com

+ Evan Gamby + Lewis Esplin + Trevor Walker + Ian Delbridge + Dave Regal + Phil White + Regan Johns + Glenn Dyer + Bob Hawke + Weston Kerr + Patrick Beasley + Nick Thompson + Matthew Straka + Mark Maginness