TelferYoung (Canterbury) Limited
Canterbury Newsletter - December 2006
22 December 2006
Return of the Strip Retail Shopping Block
The traditional retail 'strip' shopping block is back! After years of the decline in secondary retail locations we are now experiencing significant new building development in suburban areas of Christchurch. This is also occurring in other regions of New Zealand.
New retail shopping blocks have been developed in areas including Hornby, Sydenham, Aranui, Shirley, Linwood and Harewood.
These shopping blocks contain between 6 and 12 retail tenants with the mix often including a Pizza Outlet, Liquor Store, Video Outlet and TAB.
These are then supported by a range of retail uses and sometimes including office accommodation or a gym.
The new developments appear to be well regarded by tenants and investors. Rental rates are generally around $250/m2 plus outgoings and GST.
Why the change? Convenience!
The large shopping centres certainly provide a comprehensive range of retail shopping and supporting entertainment but one of the problems for customers only requiring a small purchase is the accessibility. Shopping centre car parks can be quite daunting and even after finding a car park these are often a long walk to the specific shop.
In addition the new retail shopping blocks provide services not often seen as a core function of a shopping centre - video hire, gambling, liquor sales and take away food.
A quick trip to the strip shopping block provides on site parking immediately adjacent to the shop and can meet the needs of customers wanting fast food, liquor and home entertainment all within 50m of the car!
Cost of Construction
When contemplating building, making alterations or large scale development, a keen eye must be kept on the cost to construct. The feasibility of a project can be altered when construction materials and labour costs are not accurately forecast. Scarcity of labour, and rising commodity prices have seen an upward trend in the cost to construct in recent years, a trend which is accentuated by geographical isolation.
Non-Residential Building
The construction market has been heated with construction costs escalated with reference to the Capital Goods Price Index for Non-Residential Building (CGPI-NRB). The CGPI-NRB records the average level of productive capital assets paid by New Zealand industries.
Non-residential buildings index rose 1.9 percent during the September 2006 quarter.
Source: Statistics New Zealand
Factors of Production
Commodity prices have increased over the past few years driving up the cost of construction. Increases to concrete supply and products has been 4% - 8% per annum and timber framing 4% - 5% per annum. Steel and copper prices remain at historical highs due mainly to high demand from developing economies such as China which possess strong buying power with unprecedented levels of demand for new construction.
On top of rising commodity prices is the significant increases in labour costs. Rates for concrete workers have increased by up to 29% and rates for labourers have increased by up to 25%. This labour cost can be further compounded by the remoteness of the construction site.
Further to these direct costs there have also been increases in margins. Sub-contractors margins generally have been trending upwards. In the concrete, carpentry, roofing, painting, tiling trades, increases of between 2% and 7% per annum have occurred over the past four years.
Consent requirements and compliance is an increasing area of cost which in part has been ramped up by new legislation in The Building Act. Building has become more regulated to maintain acceptable building standards within the industry.
Sub-division costs are becoming more extensive, particularly in water and wastewater services. Often existing infrastructure does not have the capacity to deal with the additional demands created by substantial sub-division or large scale construction projects. This has seen local authorities, as part of granting resource consents, impose conditions which see the developer themselves paying for infrastructural upgrades.
Overall we can see the trend for inflation in building and construction costs is appreciating, as has been the case since just prior to the year 2000.
Source: Statistics New Zealand
Residential Building
The residential buildings index rose 1.7 percent during the September 2006 quarter which was mainly driven by the construction of new houses. This increase has stemmed from rising costs of construction components, increased subcontractors charges and higher prices for fittings and fixtures.
The Department of Building and Housing provide building cost estimates which indicate an increase of 10.7% for a standard 145m2 house for the year ended July 2005.
In Summary
The non residential construction sector is still moving ahead at full capacity underpinning if not accelerating current construction cost levels. There are shortages of good builders which are seeing increased costs passed onto consumers. New construction projects, particularly those with a long realisation period will have to factor in reasonable financial protection to mitigate potential upward cost pressures.
Rural Comment
2002 through to 2005 saw a very active rural property market in Canterbury. The steady sales and increasing prices has slowed during 2006. The spring and early summer period has seen a relatively large number of properties on the market, with a high proportion not selling, as vendor expectations have largely remained above the price level which can be supported relative to production and earnings. Genuine vendors have had to meet a consolidating market.
In Canterbury there are reduced sales and the average New Zealand farm price fell slightly over the September quarter. This has coincided with a cooling in farmer confidence, the high New Zealand dollar, and increased operating costs.
The number of dairy conversions and established dairy farm sales has dropped markedly. Buyers are cautious of the level of payout, increasing running costs, and uncertainty over interest rates. Many properties are highly geared and debt levels have created negative cashflows in some cases. The hard winter of 2006 may put pressure on in 2007.
Properties with an X - Factor, within desirable locations, particularly coastal and high country areas, have been in solid demand. Potential for future development or alternative use for these properties has ensured they have commanded a premium which exceeds their economic value.
Into 2007, we anticipate a slight softening in price levels across the board as many buyers rationalise the economic returns available from farming against the uncertainty of continuing strong capital growth.
Merry Christmas
The TelferYoung team takes this opportunity to wish you an enjoyable festive season, a Merry Christmas and, of course, a Happy and Prosperous New Year.
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PO Box 2532,
Christchurch,
New Zealand.
Telephone: 03 379 7960,
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Email: telferyoung@canterbury.telferyoung.com
+ John Ryan + John Tappenden + Mark Dunbar + Chris Stanley + Mark Beatson + Ian Telfer + Victoria Murdoch + Damian Kennedy
Opinions expressed in this newsletter are of a general nature and should be used as a guide only. TelferYoung should be consulted before acting on this information.