Industrial property remains the preferred sector exposure for Forsyth Barr, having plenty of positive attributes, broker Lyn Howe says.
This was a particularly strong theme for the year ahead.
The sector had a deep occupier market, lower maintenance-capital expenditure and large land holdings offering various options over the long term.
The impacts of e-commerce were positive for the industrial property sector as online retail offerings required more warehousing space than traditional retail.
The poster child for the theme was Amazon’s large fulfilment warehouses across the United Kingdom and Europe, which could be as large as 100,000sq m.
"As competition heats up to provide consumers with greater convenience and reduced shipping times, the importance of last-mile delivery goes up."
Demand would increase for smaller distribution hubs in locations close to the population, she said.
In Auckland, that would be positive for well-located industrial property in locations such as Avondale, Penrose and Mt Wellington.
The trend would play out in coming years and was still in its infancy.
The vast majority of industrial space now being used for logistics was still located in the Auckland Airport precinct.
Also, there was significant scope for other types of properties to fulfil those requirements.
Forsyth Barr expected supermarkets and petrol stations would fulfil the role of mini logistics hubs in future, given their proximity to key transport nodes.
Forsyth Barr had identified six themes for listed property vehicles (LPVs) for the year ahead, including industrial being the "darling sector" this year, Ms Howe said. The others were:
• Strong sector fundamentals would ease.
Sector fundamentals had been outstanding in recent years with portfolios practically full and lease terms extending, largely because of deals completed for office developments.
Metrics were expected to soften this year, particularly for those exposed to office and retail.
Asset sales were expected to continue this year as a method to generate funds without raising equity. Most LPVs had completed equity raisings between 2015 and 2017 and were well capitalised. Further capital raising in 2018 was only likely to come on the back of a material transaction, she said.
• This year will be the last of net tangible asset expansion.
Last year was another strong one for activity in the property market.
Colliers estimated commercial property transactions reached $1.85billion last year and the major share was in Auckland.
Some high-value transactions were completed with strong participation from international buyers being a key theme.
Net tangible assets per share would lift an average of a "healthy" 5.5% this year.
• This year will be the first in which the cost of debt rises since 2011.
Tighter capital requirements and rising cost of funds had resulted in margins required by banks lifting 30 to 50 basis points in the past 24 months. Most LPVs had strong banking relationships and refinancing risk was low. However, higher margins would put pressure on the cost of debt across the majority of the sector this year, Ms Howe said.
The impact of the higher cost of debt would be mitigated by the continued benefit of historic interest rate swaps rolling off.
As credit conditions tightened, some LPVs had turned to debt capital markets for funding. Last year, there were four new debt market issues, bringing the total number of listed property bonds on the NZDX to nine. Bonds now made up 21% of the aggregate debt facilities across the sector and 32% of drawn debt.
• The retail sector will come under pressure.
Forsyth Barr remained "bearish" on the medium-term outlook for retail property as retailers became increasingly focused on e-commerce strategies, tempering the growth profile for bricks and mortar retail space, she said.
"While we acknowledge this is a medium-term trend and the initial impact of Amazon’s entry into Australia has been underwhelming, e-commerce impacts are only moving in one direction. This year will see these trends materialise further."
Ultimately, a lower growth profile was expected for retail assets as dominant malls delivered rental growth closer to inflation (1% to 2%) as opposed to inflation-plus or fixed reviews (2% to 3%).
• New supply will affect the office sector.
New CBD office supply had entered the market in the past year, or would be completed within the next two years, Ms Howe said.
The poster child was Precinct Properties’ Commercial Bay at 39,000sq m but there had been other new office buildings in Auckland’s Wynyard Quarter and Victoria Quarter, alongside some major office refurbishments.
Rationalisation of space by large corporate occupiers was also having an impact on the space available, she said. Colliers highlighted the 51,000sq m of office space completed in Auckland last year and another 59,000sq m now under construction.
"In our view, these trends will put pressure on rents and also increase the risk of vacancy, particularly for existing buildings which are having tenants poached for new builds."
Tenants were becoming increasingly focused on building performance, including space efficiency, energy efficiency and amenities for staff, she said.
New builds in recent years had provided more efficient floor plates, improved facilities and activity-based working.
Those trends were set to continue, putting pressure on landlords of existing buildings to improve their product to compete, Ms Howe said.
