The recent earthquakes that affected Wellington would heighten the focus on building performance as well as the financial strength of landlords, Forsyth Barr broker Lyn Howe said yesterday.
That should bode well for listed property vehicles (LPVs), she said.
In a research note, Forsyth Barr said the impact of the 7.8-magnitude Kaikoura earthquake on LPVs was minimal.
Several commercial office buildings were still unoccupied after the earthquakes on November 14, including NZ Post House, owned by Argosy Property, and Deloitte House, owned by Precinct Properties.
It was still too early to determine what level of the Wellington office stock would be affected by the quakes in the medium term, she said. However, initial reports suggested most damage was to building fit-out and services and not structure.
``We expect a short-term spike in demand from tenants who need short-term accommodation, which should assist the LPVs in filling vacant space.''
It would also increase occupancy in lower-grade office assets that had higher vacancy, Ms Howe said.
The LPVs had some vacancy in Wellington office portfolios, but portfolios were largely full. No LPV had any great upside from the situation.
Once building remediations were completed, the medium-term impact on the supply/demand dynamic in the Wellington office market would be minimal, she said.
The majority of building fit-out was owned by the tenant on each floor and they bore the cost of any damage. Damage to the building structure or services was borne by the landlord.
While insurance cover varied asset by asset, the majority of LPV assets were insured for replacement cost and loss of rents. Loss-of-rent insurance was typically in place for two to four years, with the timeframe often matching the expected timeframe it would take to rebuild an asset.
In a seismic event, any claim under loss-of-rent insurance was also included in the claim-deductible excess for that particular building, Ms Howe said.
Following the Canterbury earthquakes in 2010 and 2011, there was a significant rise in insurance premiums for commercial office buildings, which by some reports increased as much as 200% for Wellington office assets.
Competitive pressures in the insurance market had since brought premiums down to levels close to pre-Canterbury earthquake levels.
``We expect insurance premiums to rise as a result of the recent Kaikoura earthquakes. This is likely to be less than what occurred following the Canterbury earthquakes.''
Early estimates had put the total cost of the Kaikoura earthquakes in the region at $2 billion to $4 billion, significantly less than the $40 billion for the Canterbury earthquakes, she said.
Insurance premiums were typically 10% to 15% of the total operational expenditure for a commercial building. The risk on the cost of the insurance depended on the structure of a lease, which could be either gross or net. Under a gross lease, the lessor bore the risk of operational expenditure and under a net lease, the lessee bore the risk.
The majority of office leases in the Auckland market were based on a net lease structure. In Wellington, there was a mix. Government tenant leases in Wellington were based on a gross structure and many corporate occupiers also had gross lease structures, Ms Howe said.
``It's important to note, although a rise in insurance premiums is passed on to the tenant under a net lease structure, the total cost of occupancy is still important for rental negotiations. An increase could also impact a landlord's ability to increase rents at reviews and renewals.''
