Fair winds set for ‘City of Sails’ offices: a closer look at Auckland

February 11, 2019 / By

“Ladies and gentleman, it is my pleasure to introduce you to the next big thing in international office investment…. please give it up for… AUCKLAND, NEW ZEALAND!!”….

Ok, so perhaps in reality property won’t ever quite generate the same buzz as a stadium tour band, but it isn’t all that long ago that NZ was tagged by Paul Bloxham, HSBC’s chief economist for Australia and New Zealand as a “rock star” economy!  In all seriousness though, in terms of institutional grade office investment, Auckland has gone global in the last 18 months and is making itself heard.

And about time too.  Invesco (buying125Q, Chorus and 50% of the ANZ Centre) and Blackstone (the VXV Portfolio) have invested over a combined NZD $1.15bn in offices and have, between them, smashed through Auckland’s international investor glass ceiling.  More inflow of investment will undoubtedly follow and yields have naturally sharpened.

Why New Zealand? Why now?

In a world where global media headlines have been dominated by economic uncertainty throughout 2018, New Zealand’s economy and property investment market has continued to quietly, confidently and purposefully propel itself forward with little fuss or undue self-promotion.

With an official economic growth rate of 3% (to year-end September 2018), New Zealand has outperformed many key trading partners around the world and 2019 should be no different according to commentator forecasts.  The investment case for New Zealand at a structural level remains strong and robust, and more so if anything.  Population growth may be slowing on the back of easing net migration in the short term, but the population surge in recent years and a further 37% of expected future growth by 2043 in Auckland alone should continue to underpin underlying demand for construction and new property.

The case for international investment in offices has been coming…

Putting two and two together doesn’t always equal four, but there has been a very clear upward trend in the scale of office investment in Auckland in recent years so trend conclusions aren’t controversial.  We track investment sales of in excess of NZD $5m and this straightforward graph needs little interpretation in terms of Auckland’s direction of travel.

Figure 1 Auckland Office transactions over $5m Source: JLL

Keeping a weather eye on the horizon

But while there are strong winds and Auckland is traversing over the waves at a great rate of knots, it isn’t all likely to be plain sailing (yes, only one sentence but four nautical clichés!).  Prime office space vacancy rates are low – and likely to get lower – and a shortage of quality space is creating some market imbalance. But, for investors, that’s a good problem to have.  New development takes time and post Commercial Bay and One55 Fanshawe Street (both largely pre-let and adding over 55,000 sqm of high-grade space), the pipeline is naturally restricted by land availability and construction cost. This is creating opportunity.

With such an attractive and dynamic market from so many different points of the compass, Auckland is on the international radar for very good reason.  On balance, our conclusion and forecast is as this blog’s title suggests, Fair winds set for ‘City of Sails’ offices” as our view is investors will not want to (yes, you’ve guessed it)… miss the boat…

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