Locally there have been several recent sales of commercial and industrial property. Many of them have showed passing yields between 4.5% and 6%.
One question that begs to be asked is whether this is the new norm? Put simply, our market is currently showing capitalism at work and whilst this can be a wonderful thing, we need to recognise that these things do go in cycles and what goes up, often comes down by as much. As valuers we are currently assessing properties using yields that are very low in comparison to where they were a few years ago. However, it is important for our clients to acknowledge the nature of a market and the property cycle. In this regard it is possible that we are nearing the peak of this current cycle. Though, it is also possible that we will stay at our near the peak for some time yet. This will depend on a number of factors.
The economy in the Western Bay of Plenty and Tauranga city areas has gone from strength to strength recently. It is likely that Tauranga's population will shortly exceed 130,000 and it doesn't really seem that long ago that we hit the magic number of 100,000 (officially in 2004). Whilst Auckland's population is expected to hit 2 million by 2031, Tauranga is expected to continue to increase and will likely have a population of 150,000 by around 2030 (according to Stats NZ data). We also note that there has been strong economic and employment growth in the Bay of Plenty region. Our economy has recovered from the effects of Psa in the kiwifruit industry, tourism is up and population growth is leading to both general economic growth and also specific growth in the construction and wider property industries. These factors all bode well for the good times to continue. The nature of the performance of property will though be affected by the relationship of supply and demand. In this article I have looked at the demand side of the equation.
Real estate theory teaches that in general real estate demand is inelastic. This implies that in general terms demand is not greatly affected by price increases. Also that large price increases tend to lead to only limited falls in the quantity demanded. Indeed in certain circumstances increasing prices can increase demand. This is a situation that in other markets (e.g. the market for many non-essential food items or luxury goods) is counter intuitive. However in property, price increases can lead to an expectation of yet further price increases. This provides the motivation for purchasers to buy now rather than wait till later. This is through a generalisation and we need to look at specific markets to see how extreme this affect is. In areas where there are many acknowledged substitutes, this effect is lower. However, in areas where there is a low possibility of true substitution this affect is greater. A good example of the latter is downtown Mount Maunganui where the main portion of downtown Mount Maunganui is situated on Maunganui Road between Salisbury and Pacific Avenues. This area is typified by a very low number of sales, a perception of capital gain, a limited supply and very low vacancy levels. In this location what is true for the demand to purchase property is also true for the demand to lease space. There is a noticeable premium in rental over the areas located just outside it and additionally there has been a historically very low level of vacancy through both strong and weak economic conditions.
To a lesser extent the market for the purchase of property in the greater Tauranga area shares many the characteristics of downtown Mount Maunganui. Though several other factors come into play (such as the exact location, comparable supply of other such property, utilisation, lease terms, zoning etc). The current Tauranga market has been bolstered not by wildly increasing rentals, but mainly through falling yields.
The Tauranga market at present shows a strongly inelastic demand. Rising prices and falling yields do not appear to have dented investor demand or confidence in the market. To a certain extent Tauranga's gain could be to the detriment of other regions of the country that are not experiencing such a strong local economy and property market performance.
As a final word though, in the last downturn the wider Tauranga market did not share the same inelasticity of its demand from tenants that was shown in downtown Mount Maunganui. When considering a purchase or sale of a property I would still advise looking closely at the strengths, weaknesses, opportunities and threats. The best practice is that all valuers should be detailing these in market valuation reports. A careful consideration of these factors will assist you greatly in weighing up whether to purchase or dispose of a property asset both now and in the future.
By Paul Higson