A recent presentation to the Wellington City Council Economic Growth and Arts Committee has revealed that commercial property investment has doubled in Wellington over the past year
A recent presentation to the Wellington City Council Economic Growth and Arts Committee has revealed that commercial property investment has doubled in Wellington over the past year. 2015 saw commercial property investment of $500 million in comparison to 2014, which saw $250 million.
JLL’s director of research and consultancy Justin Kean gave a presentation at the Property Council’s Wellington market outlook breakfast earlier this year. Following is a summary of his thoughts on the Wellington market.
JLL predicts a topping out of the office market in 2016. “It’s a stable scenario in terms of rents and an improving investment market, but the market has done its dash in terms of rental growth, particularly at the top end,” said Kean. “This relates both to new supply coming on line as well as the crystallisation of government plans to reconfigure its footprint.
“In terms of overall returns, JLL anticipates the office market will continue to perform well due to the fact that investment pricing is likely to continue to improve, which is typical of this stage of the property cycle.”
He pointed out that at this point secondary assets tend to see significant uplift in values because buyers cannot achieve what they want to in better quality stock, so secondary stock tends to outperform.
Impacting the Wellington market this year will be the Property Management Centre of Excellence’s (PMCOE) decisions.
“In 2015, office owners could only sit on their hands and wait to hear where the government departments would end up. This is the year they’ll be able to make their decisions and deals will be done. This clarity will likely lead to considerable transaction activity through the back end of 2016 and into 2017,” said Kean.
“The sector that’s likely to perform the best this year is retail. In Auckland we’ve seen retailers coming in and bidding out rents to get the best spots. That will happen in Wellington too. Fast fashion, luxury retail and food and beverage are the sectors where the growth will be.
“This is the year that retailers return to the Wellington market and grow their footprint. We’ve all heard the news about big brands like David Jones, Jamie’s Italian, Top Shop and Lululemon coming to town.”
Kean explained that in 2013 Wellington was at the bottom of the property cycle. Fast forward to 2016 and the office market has moved forward and is nearing its peak, whereas retail still has the good growth to come.
Kean highlighted that in Wellington there is a persistent gap between prime and secondary vacancy rates. In the past, if prime moved, so did secondary.
There has been a decoupling of that trend since 2010 and JLL believes a lot of it relates to the impact of seismic regulations.
“In retail there’s capacity for an increase in retail rents. It used to be that retail rents would follow sales. But Wellington high street rents have diverged from sales, so there’s capacity for retail rental growth,” said Kean.
“There’s been a significant increase in the total volume of institutional transactions. Both 2014 and 2015 were massive years, relative to the historic context. That increase has come from Wellington, Christchurch and the rest of New Zealand, rather than Auckland.
“This all follows a global trend – it’s not just New Zealand seeing these results.”
He concluded by pointing out that yields continue to firm across the globe. “As we near the end of the property cycle, JLL expects to see a market correction occur in the near future.”
