COVID19: Notes from the field vol. 3

As New Zealand anticipates moving to Alert Level 2 in the next week with new cases of COVID-19 currently at minimal levels, we want to share our observations impacting the commercial real estate market.

• According to the RICS Q1 2020 NZ Commercial Property Monitor, prime office and prime industrial properties are expected to be far more resilient than retail, seeing little change in rental and capital values. The theme across CRE capital markets is a ‘flight to quality’, with the yield spread between primary and secondary assets expected to widen significantly.
• By moving to Alert Level 3 on the 28th of April 2020, 500,000 more New Zealanders were able to work. Of these, manufacturing, forestry, and construction were the biggest beneficiaries, along with online retail, takeaways, distribution, and transport. At Alert level 4, it was estimated that 40% of the economy was closed. At Alert Level 3, this figure reduced to approximately 24%.
• The Government has announced a significant element of its COVID-19 rebuilding plan with a law change that will fast track eligible development and infrastructure projects under the Resource Management Act to help get New Zealand moving again.
• The Government has also started work on ‘shovel ready’ projects to boost the economy. Auckland Council has begun work this week to replace aging infrastructure and transform Hurstmere Road in Takapuna’s town center into a more open, vibrant, and accessible retail destination. As RBNZ pulls monetary levers to revitalise the economy, the focus will now shift to the Government and its ability to stimulate the economy using fiscal policy.
• In the wake of COVID-19, commercial real estate agencies have noticed a considerable uplift in interest from business owners considering whether to execute a sale and leaseback of business premises. The pandemic has brought about significant cash flow issues for businesses. Sale and Leaseback transactions to strong tenant covenants will likely be the preference for investors in the coming months.
• Commercial leasing agents are noticing an increase in sub-lease inquiries in the office leasing market, as businesses reassess their space requirements and look for more flexibility going forward.
• Planning commissioners have accepted a major transition of the Smales Farm office park on the North Shore into a transit-oriented form of mixed-use development over 20 to 30 years. The proposal includes a mix of retail, office, and residential uses over the site. The North Shore is earmarked for future urban growth and is witnessing increasing public and private investment.
• Listed property fund Stride has announced portfolio valuation updates. Their overall portfolio valuation was flat. Industrial assets were up 13.7% over TTM (trailing 12 months), office assets were down 2% over TTM, and retail (shopping centre) assets were down 11.4% over TTM. Industrial property continues to show resilience across the market, while retail remains the hardest hit.
• The Overseas Investment Office has consented to Stride Property Ltd’s sale of three large format retail properties to Investore Property Ltd for $140.8m. Investore recently completed a $100m capital raise, which was oversubscribed as investors showed their preference for essential service tenants and funds with low-gearing.
• Countdown's brand new Hamilton supermarket will allow shoppers to pick up their online orders via a "store-to-boot" drive-thru, the store opening one month earlier than expected to meet increased demand.
• American retail giant Costco has received the go-ahead to build its first store in New Zealand that will cover nearly two rugby fields and cost $100m. Auckland Council has approved the resource consent applications for the three-storey building at Westgate in Auckland.
• A rise in demand under Alert level 2 is expected in the investment market, as buyers looking for prime assets and opportunistic sales start to emerge. An increase in transactional evidence will begin to provide more clarity on pricing and yield movement across sectors.
• Investors are reflecting on a global monetary system with a surplus of cheap money and a substantial rise in sovereign debt, which is driving a concerted effort by central banks to keep bond yields low. There has also been a sharp decline in dividend distributions, and interest rates are at record lows for the foreseeable future. These factors will lead to investors placing a high priority on reliable sources of return, increasing the appreciation of durable property income, and insulating against major yield shifts for quality prime stock.

Please feel free to reach out here, if you would like to discuss any of the above.