The view on the ground from Christchurch
It’s pretty clear when you’re on the ground in the Christchurch CBD that plenty is happening, buildings are going up very quickly, and the perception of a failing rebuild, to our minds, can really only be based on delays to a few isolated (albeit high-value) anchor projects, such as the conference centre. That said, the prospects over the next 2-3 years may not be quite as inspiring, particularly for the office sector.
Starting with the reported statistics for the industrial property sector, the news is pretty good. CBRE recently reported, for example, that the vacancy rate amongst existing property in the city’s main industrial precincts is less than 1%. A benchmark level of vacancy that allows for new start-ups or normal business relocations as they grow, or simply decide that they want different or better spaces, is about 5%. So the current amount of empty industrial stock is very tight, which can only put upwards pressure on rents.
Retail property prospects in the CBD are a bit patchier and dependent on the building’s quality and its prospective tenants. With all of the space being shiny and new, rents that developers and building owners are aiming to charge are probably too high to be achievable for smaller independent retailers. That said, the likely rents when the space is complete don’t seem to be a problem for several larger retail chains targeting Christchurch, such as international brand Topshop.
The office sector is where any problems lie for the Christchurch commercial property market. Granted, it doesn’t take long talking to mid-tier and smaller professional services firms to realise that they don’t want to take the risk of being marginalised and stuck long-term in their current post-quake fringe premises – they want to be back in their central city locations, close to their clients. The risk of being regarded as just another suburban accounting or law firm is very real to these businesses. This appetite should bolster property demand over the next year or two. In addition, the big private firms and government occupiers are happy to be in the CBD, and many have already been back for some time.
But while high levels of non-residential construction are great for the city’s employment and GDP at present, it seems plausible that, even with decent levels of demand, rampant growth in supply could still plausibly drive up vacancy rates across the CBD office stock to more than 20% by the end of next year. In our view, not only will that cap rental growth but it will actually start to push them down again as landlords struggle to find tenants willing to pay. Protecting headline rents by granting long rent-free periods at the start of a new lease amounts to the same thing – lower income for landlords.
Bringing this together, then, the case for more offices in the Christchurch CBD looks on the weak side. But for potential owners and investors in the industrial sector and certain types of retail there are opportunities. Early movers in other full-scale redevelopments around the world, for example London’s Canary Wharf, have certainly done well. And it’s also worth bearing in mind that New Zealand’s interest rates are unlikely to move anywhere quickly, and certainly not upwards for a fair while. Our forecast is that there won’t be an increase in the OCR until late 2018. On top of that, most evidence suggests that the current spread between prime property yields and financing rates is high enough to remain attractive, even if interest rates rise sooner and faster than expected.
More generally, with the rules around residential property investment getting progressively tighter, it wouldn’t be a surprise to see more capital start to target the commercial sector via pooled funds. And why not? After all, commercial property can be a really good hybrid asset, with scope for equity-like capital gains and, with a solid tenant signed on to a long-term lease, bond-like income returns.
To us, many parts of the Christchurch commercial property market are worth keeping an eye on.
Insights in this article are supported by the recently released Infometrics Regional Construction Outlook, a web based profile that provides detailed construction data and forecasts at a regional, territorial authority and Auckland ward level. For more information about the Regional Construction Outlook, click here.