TelferYoung (Taranaki) Limited

Current | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005

Property Investment in Taranaki

5 October 2006

Who would have thought that the current real estate boom which began in 2001/02 would have lasted so long?

Economists will provide a list of reasons for the sustained activity, including increases in personal wealth, low unemployment, comparatively low interest rates and easily accessible funding. Of course Taranaki has its own advantages with the energy and farming industries and the current high oil price. Whatever the reasons, the last few years have been interesting with changing trends and some mixed messages. Here is a quick overview.

Many New Investors

Increased personal wealth, plus the euphoria and hype that has accompanied the current property boom, has attracted many new investors to the market. A number of these have initially invested in residential properties and those that were 'quick off the blocks' have often achieved good capital growth. As a result of this surge in residential activity, returns on investment from residential flats have fallen from around 9-11% to be currently at 7- 8.5% on a gross basis. Individual houses that have been bought for rental purposes recently are showing still lower levels of yield, now between 4-5.5% gross on purchase price. On the subject of rental housing the BNZ in its weekly Overview (27 July 2006) reports that house price growth is outstripping rental growth with two interesting statistics: in the past year house prices on average are up some 12.2%, while rents have increased just 2.6%.

The BNZ asks the very pertinent question as to 'at what point does the low yield worry outweigh capital gain expectations and scare buyers away?' Understandably TelferYoung, like the BNZ, does not have an answer to this question; what we do know is that when the market levels off, low returns and negative gearing will erode any capital gain that has been made.

The Industrial Land Market

Industrial section sales have been the best performing market sector recently and are a good indicator as to how strong the market has been. Resales of sites show considerable price increases over the last five years. In the Waiwhakaiho Basin a 4000 m² site that sold in June 2001 for $32 per m² resold in June 2003 for $76 per m² and has recently been part of a sale of a larger block at a price in excess of $200 per m². That's an increase of 600%+ in five years. Nearby Hurlstone Drive has gone from $30 per m² to more than $100 per m² in the same period and land in Connett Road that originally sold at $5 per m² in November 2002 recently resold for $45 per m². Other recent sales in the Bell Block Industrial Estate have gone for $60-$70 per m².

Industrial and Commercial Buildings

Demand for space has also seen a flurry of new building activity especially for the bulk retail/light service industry sector. Where buildings have been purpose built the rental has often been determined as a pre-agreed return on cost. Because of rising land values and building costs, rents have also increased.

The new bulk retail stores in the Waiwhakaiho Basin are showing rentals of $150-$200 per m² with car parking included; new developments in Hurlstone Drive are typically $60-$70 per m² for workshop and $90-$120 per m² for office/showroom; while for heavier industry in Bell Block rents are $55-$65 per m² for workshop and $80-$100 per m² for office space. Retailing in Devon Street is in the range of $180-$300 per m².

Apart from Devon Street, these figures relate to new buildings. Rents for older established properties are discounted depending upon the quality of the premises. Owners of these older properties need to consider refurbishment to keep their buildings competitive in today's market.

Yields

In the commercial sector there are currently a wide range of yields and some mixed messages. A yield is the level of return an investor seeks after considering all aspects of the property including location, the nature of improvements, length and term of the lease, leasing history of the property, the quality of the tenant, and the relativity of the contract rental to the market rental. There have been no recent truly 'blue chip tenancy' property sales, however recent sales of second tier properties suggest that in the CBD a yield rate of 8-8.5% is current, while on the periphery 9-9.5% is more common. Based on these figures, percentage yields have fallen 2-3% over the last three to four years.

Mixed messages are occurring in the lower priced commercial market, particularly where a tenant is acquiring the property occupied or an intending owner-occupier is buying a vacant property. In this sector yields in the range of 5-7% have occurred.

Comment

While there still remains a healthy demand for property, the first signs of change are beginning to appear. Some listings are taking longer to sell; vacant properties on the periphery of the CBD are remaining empty for longer periods; and there are vacant sites waiting for development. The real estate market is always cyclic and it is unrealistic to expect values to carry on strengthening ad infinitum.

When the market eases TelferYoung believes that there will be a soft landing in Taranaki rather than a sudden fall, because of the strength of the local economy. How well individuals fare with their property investments during this period will reflect in the quality of the information and advice on which they base their decisions.

Back issues of the newsletter can be obtained from TelferYoung (Taranaki) Ltd
143 Powderham Street,
P O Box 713,
New Plymouth,
New Zealand.
email: taranaki@telferyoung.com

+ Mike Myers + Ian Baker + Adam Boon + Fintan McGlinchey + Monique Burr + John Larmer