Commercial property prospects look healthy

Dunedin’s commercial property sector is in good health with high rental yields, low vacancy rates and office rents at multi-year highs — plus an expected boost from the up to $1.4billion hospital build.

Economic data analysis company Infometrics said commercial property in Dunedin tended to “slip under the radar” of investors, as few buildings were of sufficiently high value to attract the big institutional investors.

However, Infometrics’ senior economist Kevin Davidson said, given the solid local economy in Dunedin and the long-term impetus which will be provided by the hospital redevelopment, future investment returns on offer from Dunedin properties could be quite attractive.

“Given the economic backdrop, it’s no surprise that Dunedin’s commercial property market has been healthy.”

In a separate survey, Colliers International national director Alan McMahon said tenant inquiry was at an all-time high in Dunedin’s CBD and overall vacancies had dropped to 10.5%, the lowest rate recorded since surveys started in 2011.

“The CBD office development has shifted into gear across the main centres, as well as in smaller markets, stimulated by strong demand,” he said.

In Dunedin, prime office vacancy had dropped “substantially” since 2011 from 11.8% to 1.1. Prime space had been taken by Regus, ACC, Wilkinson Adams Lawyers and Worksafe during the past six months.

He said the recent completion of The Granary in Cumberland St, 77Vogel St and the Harvest Court Mall in George St had added an additional 8240sqm of new stock to the market.

Mr McMahon said prime and secondary office rents and incentives during the past year had remained “stable”.

“However, with vacancy [levels] at record lows, rents may edge upwards in the short term,” he said.

The release of Infometrics’ quarterly economic monitor of Dunedin last week showed  particular strength in building consents and vehicle registrations, while house price growth and tourism expenditure had also been solid, Mr Davidson said.

That combined with dairy farming on the Taieri Plain, and the rest of the provincial areas around Dunedin, were starting to enjoy better returns, he said.

“The city should also start to see spillover economic benefits,” Mr Davidson said.

Dunedin’s GDP had expanded by 2.4% for the year to June, as good a growth rate as at any time in the past decade, the key drivers having included public administration, the IT sector and financial and insurance services, Mr Davidson said.

He said rental property yields in Dunedin could be attractive to potential investors.

“Industrial property yields in Dunedin are currently in excess of 8%, about two percentage points higher than Auckland,” Mr Davidson said.

However, he cautioned that given Dunedin was a smaller and less liquid market than Auckland, it was potentially harder to sell a building quickly, so Dunedin’s yields needed to be higher than Auckland.

Consistent with available space tightening from increased demand, Mr Davidson said office rents had risen to multi-year highs, while prime warehouse rents were also trending upward, due to limited supply and the healthy demand.

“Although the start date remains very uncertain, eventual spending of $1.2billion – $1.4billion on construction of Dunedin’s’s new hospital will deliver a significant impulse to Dunedin’s economy,” Mr Davidson said.

Aside from the hospital, there was a significant pipeline of construction work associated with the university and polytechnic in Dunedin in coming years.

Mr Davidson said the prospect of extra construction workers coming into the CBD each day should boost retail and everyday spending, and in turn those retailers’ landlords would expect increased returns.

Looking ahead, Mr Davidson expected Dunedin’s economy to continue to do well, which would underpin occupier demand for office space and prompt rental growth.

“For example, our forecast is that the number of filled jobs in Dunedin will rise from around 60,800 now to 64,700 in 2021,” he said.

Many of the new jobs were likely to be in business, human resources and marketing professionals, office managers and programme administrators, he said.

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