TelferYoung (Waikato) Limited

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Waikato Newsletter - September 2009

30 September 2009

Welcome to our September 2009 edition of the TelferYoung Waikato Newsletter. In this issue we discuss the Hamilton Office Market and the vacancy rates in the CBD, as well as touching on the Residential and Rural sectors.

General

We look at the last few months in brief:

• Monetary Policy remained unchanged in September, leaving Official Cash Rate at a record low of 2.5%.
• The general consensus is that the NZ Economy has stopped shrinking, but that growth will be slow over the next few years.
• Positive signs for NZ include the recent lifts in commodity prices and predictions that the unemployment rate will not break through the 8% level as thought.

Commercial/Industrial

Investment Property Commentary

The market was slow during the early part of 2009 with continuing low levels of demand from late 2008 where high mortgage interest rates and an uncertain outlook in both the global and New Zealand economy created uncertainty.  Mid 2009, there were a number of investors who have returned to the market for property following the fall in both fixed term interest rates and mortgage rates, together with a slight upward movement in property returns.

Demand has shown signs of firming for good quality investment property in both the commercial and industrial sectors.  The market is primarily placing reliance upon lease structure and the stature of the tenant.  Property subject to medium to long term lease commitment, with a respected tenant, is generally attracting returns in the range of 7.75% - 8.50%.  Property outside of these criteria subject to shorter term lease commitment and local tenancies are in most instances falling between 8.50% and 9.50% as are the larger investment properties in excess of $4 million.  We have seen a number of smaller investment sales in the Hamilton market that have attracted yields of below 8%, while these properties may lack the strong lease commitment and in some instances are in secondary positions; they are of an affordable level to the smaller investor and would appear to have attracted demand for that reason.

Hamilton Office Market - June 2009

Office Vacancy Survey

In June TelferYoung (Waikato) Limited conducted a survey of office buildings within Hamilton's CBD and the outer fringes to calculate vacancy levels.  We calculated total CBD & Hamilton East office stock at 225,606m², with a vacancy rate of 11.84% or 26,711m².

The City was divided into precincts and the vacancy levels were relatively consistent; Central CBD - 11.17%, CBD Fringe - 13.14%, Outer Fringe - 12.74%.  Hamilton East's only vacancy was floor one of the Deloittes building and was therefore an outlier at 8.66%. 

The total office stock throughout the precincts is illustrated below.  Of interest is the quantum that both Te Rapa and Residential Offices provide.  Seen graphically, it shows the nature of the office disbursement throughout the City, with Te Rapa and the Residential Offices providing some 17.3% of the total office stock 272,801 m² (inclusive of Te Rapa and Residential offices).

As part of our analysis we identified four main categories of office quality, Grade A being the premium accommodation in the City, through to Grade D being very poor space.

• Grade A stock measures 11,756m² and the vacancy is 10.21%, (solely due to the vacant Deloittes building first floor). 
• Grade B stock measures 131,612m² and the vacancy is 4.21%. 
• Grade C stock measures 65,073m² and the vacancy is 19.50%
• Grade D stock measures 17,164m² and the vacancy is 42.38

Comparison of the vacancy level in C & D grade stock with the Residential Office stock provides some indication of how this vacancy has grown and the likelihood of future demand being generated to re-fill that C & D grade stock.

Residential offices have grown strongly over the last 5 years. They are mostly located along major and minor arterial routes within the City, adjacent to suburban shopping centres and the immediate fringe of the City Centre.  We identified 174 houses being used as offices equating to the total stock of 27,512 m².

They are principally owner occupied, often the owner has come from a tenancy situation and compares paying rent to paying off a mortgage.

A Residential Office therefore offers:

• A long term investment in conjunction with the owners business
• Profile where previously their occupancy was part of a larger building
• Access for both staff and clients with either street or on site parking

In summary the impact of Residential Offices and Office development in Te Rapa can be shown as follows;

Residential

The Hamilton Residential Real Estate market showed much lower activity throughout 2008 and into January 2009, however increased activity from February this year has resulted in a steadying of sales prices and in some cases a slight lift, creating a more positive market than seen from mid 2008 to early 2009. 

Sales Volume

The graph below shows a stabilising of sales volume over the past five months, however still well below the levels we saw in 2005 and 2006.  In January of this year the total national sales volume recorded by the Real Estate Institute was the lowest since 1992.  This recent increase in activity has most likely been due to low mortgage rates, positive net migration and a diminishing gap between purchasers and vendors expectations.

Despite the recession and many market commentators observing that property prices are still high, it would appear that the lack of stock currently available, positive net migration and low interest rates seem to holding up values. We expect an increased number of listings to come onto the market over the coming months due to seasonal factors and this may result in the current premiums achieved at the moment due to the lack of supply to wane.

Rural Residential

The rural residential property market was in a "wait and see" phase in late 2008 and early this year, during which time sales volumes were low and in January the total national sales volume recorded by the Real Estate Institute was the lowest since 1992.  Since then volumes have increased.

2007 saw an average of 78 Waikato rural residential sales per month, dropping to 32 sales in January 2009 and climbing back to an average of 59 over the last three months.  The return to higher volumes should have halted the slide in prices, which has seen the median price drop from $445,000 in 2008 to $404,000 in the first half of 2009.

Rural

Since our last newsletter Fonterra announced their end of season payout at $4.55kg MS, then this month revised that to $5.10kg MS. The initial announcement placed further pressure on rural market activity, not only with dairy farms but also drystock farms, emphasising the considerable influence the dairying industry has within this region.   Fonterra's directors now appear somewhat buoyant about the remainder of the season. 

Although red meat sale prices have eased slightly, overall they continue to experience good returns.  The demand for these properties however is weak and any negotiations reflect current profit margins, affected by higher costs, restricted access to finance and the removal of dairy industry investment.

Given Fonterra's announcement this month we anticipate restricted demand for farms in the short to medium term, reflecting a more responsible attitude to farm value in relation its potential profitability. Furthermore investors in a strong financial position will be able to use it to their advantage when acquiring additional land.

Back issues of the newsletter can be obtained from TelferYoung (Waikato) Ltd
ph 07 839 2030
Fax 07 839 2029
489 Anglesea Street,
Hamilton
www.telferyoung.com
email: waikato@telferyoung.com

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