Industrial property to benefit from changes to residential investment landscape.

PROPERTY NEWS / 16 April 2021

Last month’s changes to the residential investment landscape have seen the tide turn on residential property as an investment strategy.

The outgoing residential property investment tide has contributed to a growing king tide for commercial property, and industrial property in particular, as investors explore alternative investment strategies.

Commercial property sales are not subject to the “bright-line test” capital gains tax.

Depreciation can be claimed on commercial buildings as well as chattels.

Acquisition costs are often similar to residential investment properties. CoreLogic and Colliers Research data shows ~65% of all commercial and industrial property sales in New Zealand are for less than $1 million.

Industrial property accounts for ~50% of all commercial sales by volume.

The industrial property sector is generally regarded as a safe haven for investors thanks to strong occupier fundamentals and stability in long-term returns.

An alternative to directly owning commercial property is provided by commercial property funds. Lower entry prices of ~$50,000 for a hands-off investment with potential additional tax benefits if the fund is a PIE scheme provide an attractive alternative.

Interest rates are predicted to remain low for a number of years, driving investors to consider high-dividend funds, especially those exposed to lower-risk sectors such as industrial property.

With residential property prices now expected to follow a lower growth trajectory, there will be less pressure for the Reserve Bank of New Zealand (RBNZ) to increase interest rates, keeping them lower for longer.

As the ‘wealth-effect’ from residential property price rises drops off, the resultant lower consumer spending will impact the retail sector. Retail property is already under pressure from changes brought about by the growth of online retailing.

The office sector is also under pressure with Covid-19 accelerating changes that were already gaining momentum. Companies are increasingly adopting a “core + flex” model of working, which often features a work-from-home policy. Bayleys Research data shows overall Auckland city fringe vacancy rates increased to 10.4% by the end of 2020. CBD office vacancies sit at a similar level, while the Southern Corridor sits at 13.9%. This excludes a significant amount of “shadow space” available for sub-lease, which is putting downward pressure on rents.

While the pandemic caused disruption across New Zealand, the impact on the industrial property sector was mitigated by a number of factors. Many manufacturing companies were classified as essential services and permitted to trade during Level-4 lockdowns. At the same time, demand for services such as storage and distribution increased. Some Provincia Property Fund tenants did record turnover during this period.

Subsequent to lockdowns, the solid backdrop for industrial property has been enhanced by New Zealand’s stronger than expected economic performance. Demand fundamentals have been strongly supported by a rapid return to expansion within the manufacturing sector and growth in logistics service providers. The BusinessNZ Performance of Manufacturing Index (PMI) hit a record low of 26 in the middle of last year’s lockdown, but has since rebounded into expansion territory (over 50) every month this year, hitting 64 in March 2021. It is the strongest result in the survey’s history dating back to 2002.

Colliers reports that given current demand drivers, industrial vacancy rates are likely at peak demand levels. This means tight market conditions are likely to return. The shortage of industrially zoned land is resulting in further upward pressure on industrial property, especially within established precincts.

After a short period of stable yields in early 2020 when most investors adopted a more cautious approach, competition and purchasing intent for industrial property has escalated, driving yield compression.

Despite this yield compression, Provincia today paid a dividend to investors of 6.6% pre-tax for the quarter ended 31 March 2021. This provides a total 6% pre-tax cash yield for the full year ended 31 March 2021. This is an excellent result for shareholders given the Covid-19 rent abatements and related market conditions.

© Provincia Property 2022
Fund Management LTD

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