TelferYoung (Nelson) Limited
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Nelson Newsletter - Summer 2009
4 February 2009
Welcome to our Summer 2009 edition of the TelferYoung Nelson Newsletter
Nelson Commercial Market
The 2008 year witnessed a significant reduction in commercial sales activity in the Nelson region compared to the previous year. The 2007 year sales volume was however extraordinary, as a number of investors, some long term syndicates realised investments at a time of historically low capitalisation rates.
The uncertainty evident in the financial markets during 2008 was reflected in lower activity levels with a number of sales recorded being sold under pressure.
Owners appear to be sitting tight riding out the volatility evident in our financial and equity markets. Such strategy should provide benefit as interest rates continue to fall significantly toward unprecedented levels in the official cash rate.
Notably the sales include the National Bank which sold under favourable lease terms and conditions and at a capitalisation rate on the passing rent of some 6.8%.
This sold as part of an auction portfolio of National Bank properties throughout the North and South Island. The South Island auction set benchmarks unexpected by advisors and investors ranging from yields of 5.7% to 7.3% over the 9 properties auctioned. Included also of note was the National Bank in Market Street, Blenheim which sold on a yield of 6.3%.
The National Bank properties went to auction on 2 September prior to the full effect of the credit crunch being reflected in the economy. From the start of September the New Zealand share market index has broadly fallen 20%.
A similar softening trend has been evident in the property market. In November nine Carters building supply retail yards throughout New Zealand were put to auction. These were sold on 9 year leases, similar to the National Bank properties, but with minimum 3% annual increases. The sales showed a range in capitalisation rates of 9-10.5% with the majority falling within the range of 9-9.5%.
Central Nelson Commercial Sales
Address | Sale Date | Sale Price | Cap Rate | Comment |
155 Trafalgar St | Apr-08 | $980,000 | 8.6% | Two ground floor retail premises on separate unit entitlements sold as one parcel. Cap rate on passing rent. |
123 Hardy St | Apr-08 | $440,000 | - | Sold on vacant possession comprising 160 m2 historic colonial two-storey building on site of 147 m2. |
248 Trafalgar St | Sep-08 | $4,180,000 | 6.8% | National Bank sold on leaseback for 9 years. Architecturally designed two-storey building with carparking. |
135 Hardy St | Jul-08 | $920,000 | 7.5% | Hardy's bar on corner of entrance to Montgomery Carpark. |
288 Trafalgar St | Oct-08 | $1,550,000 | 6.7% | Two-storey office building sold with potential upside under contract rental review provisions. |
218 Trafalgar St | Nov-08 | $2,640,000 | 8.4% | Multi tenanted, four-storey building housing Mid City Motels in central Trafalgar Street. |
68-80 Bridge St | Dec-08 | $4,250,000 | - | Former H&J Smith property. Ground occupied by Postie Plus. First floor Gymnasium and vacant offices. Sold under prolonged mortgagee sale process indicating a return of circa 9.5% on contract rents and potential rent for vacant premises. |
The Carters sales indicate a significant outward shift in capitalisation rates compared to those established in the first three quarters of 2008. More recently listed property companies have announced realisation of assets as they move to stabilise balance sheets. These sales also show an outward trend in returns. ING sold four properties in late December for $15 M at a weighted cap rate of 9 % on contract rents. The sales show a fall of 7% on the March 2008 asset values.
It remains to be seen if the full extent of this sentiment will be reflected in capitalisation rates in our local market.
Our view, based on the market feedback at hand, is that there is still strong local investor demand and that any further outward movement in capitalisation rates is likely to be minimal for good quality investments as investors take advantage of the lower cost of capital to enable gearing of commercial investments. Nevertheless we have experienced an outward movement in capitalisation rates compared to the levels experienced in late 2007 as investors build in the prospects of lower rental growth and additional tenancy risk.
Recent new letting and rent review evidence in central Nelson confirms modest, if any, rises in commercial retail rentals. Office space rents have shown continued growth but now with a significant differential of some 30%-40% between new and older office accommodation.
No new office lettings have sustained the rental level established for the new ACC development in Collingwood Street, where the rental has been at $380 /m2 plus outgoings. It remains to be seen whether the rental established remains an aberration in our marketplace. The new building incorporates 'green building' environmental features. Feedback evident from other centres on new office and 'green building' development indicates a two tier market indicating local commercial businesses can not sustain the rentals for new green office space which seem to be primarily aimed at government or large corporate clientele.
The outlook for 2009, looks to be one of subdued tenancy demand, increased tenancy risk and consequently one of limited rental growth. The prospects are good for astute investors to find real opportunities. Overall demand for commercial property investment should increase as returns improve relative to decreasing bank deposit rates and the volatility in the equity markets.
Heart of Nelson
The Nelson City Council have recently released the draft Nelson Central City Strategy which makes a number of proposals affecting the inner city area. Notable content open for comment includes:
- Improved connectivity and streetscapes with major upgrade proposals to the Montgomery Square/Bank Lane frontage.
- Enlarged outdoor dining areas for the café/cultural heart in the upper Trafalgar Street precinct.
- Proposed city centre expansion into the current fringe commercial areas west of Rutherford Street, east of Collingwood and north of Halifax Street.
- Provision for service commercial showrooms and trade in the western side of St Vincent Street.
- Extend capability for offices into the Vanguard/Gloucester area.
- Develop a signature large format retail building in Wakatu Square.
TelferYoung Quality Management System
TelferYoung Nelson is pleased to advise that we are now fully certified to meet Conformance Standard Q-Base Code:2001. This means our business operates a quality management system to the standards set by Telarc SAI.
As part of our quality management system and TelferYoung National Standards we have implemented a new initiative whereby we issue terms and/or letters of engagement upon all valuation instructions. For our regular clients you will only receive our terms of engagement once and upon any updates to these terms. This initiative has been designed to regulate our terms of trade and provide continued quality service to our clients.
Back issues of the newsletter can be obtained from TelferYoung (Nelson) Ltd
Phone (03) 546-9600
Fax (03) 546-9186
www.telferyoung.com
email: nelson@telferyoung.com
+ Ian McKeage + Rod Baxendine + Bryan Paul + Ashley Stevens + Wayne Wootton
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.