As I recover from Covid I am writing this next article while listening to a webinar by a UK institutional company sharing their view on the 2022 outlook. Participants were asked to vote on the drivers they saw to performance in 2022, and Covid scored a mere 2%. The two top scores were inflation and geopolitics, which I believe is an expected response from a region that is experiencing rounds two and three of Covid as many of the G20 markets move forward in a post-Covid environment.
The Russian invasion of Ukraine, high inflation and corresponding interest rates, the fall of the crypto currency and the drop in global share markets would indicate that an economic contraction of sorts is around the corner. Economic and financial decoupling with Russia and the imposed sanctions have seen countries around the world find ways to rely less on Russia for materials and energy supplies.
In March, Shanghai responded with a zero tolerance approach to Covid when the population of 26 million went into lockdown. This has put further pressure on supply chains and pricing for materials and products imported into New Zealand. It is no surprise that the cost of living has increased for energy and food; both are essential for consumers.
As we navigate these uncertain times, we need to consider the risk of real estate investment versus the reward. Investing in resilient sectors is on the mind of many investors. Essential services such as medical, healthcare and grocery have proven to be resilient, together with industries supported by government subsidies, such as childcare centres. This government support provides additional appeal for investors. Typically, leases are in excess of 10+ years, with regular rent review cycles to maintain rental growth and investment performance. These types of properties provide enhanced rental certainty and are resilient in uncertain times.
Supermarkets provide an essential service and their attractiveness as an investment remains robust. The challenge is to ensure rental growth during the term of the lease. Many supermarket leases are on a base rent subject to a turnover top-up. To receive the turnover rent top-up, a turnover threshold is set out in the lease. It is therefore important to understand the turnover performance of a supermarket and whether rental growth can be anticipated.
The industrial sector for quality stock shows no sign of abating and goes from strength to strength. Investment yields for prime industrial space are being maintained between 3.75% and 4.5%. With many industries choosing to address the supply chain issues by holding more stock, industrial vacancy rates across Auckland are sitting below 2% with strong demand from occupiers requiring additional space for growth. Due to industrial supply constraints and a lack of stock coming to the market, rents continue to soar due to lack of supply. This is assisted by consumers' growing appetite for online shopping as the virtual experience improves and the transaction becomes more seamless, which increases the requirement for retailers to have more warehousing space. Occupiers are renewing or extending their current leases and in some cases finding additional warehousing close by to meet their requirements.
Offices certainly have a future, but we are in a transitional period as companies respond to their company space needs by reviewing their requirements going forward. For many companies the response has been hot desking; you don’t have a permanent desk and there is additional collaborative space including break-out areas for employees to be creative, knowledge share and grow talent. Employers are challenged to ensure their employees are motivated to return to the office and leave the comfort of their homes. For many companies this means employees are returning to the office two to three days a week. We will continue to invest in quality office buildings, occupied by strong covenants which are well located close to transport links and amenities.
We are on the search for our next resilient property investment. The hike in interest rates and strong yields make our thorough due diligence process to identify a new property more challenging. We believe in the process and the right property will be identified soon. Watch this space!
For further information or to register your interest for our next syndicate, please contact us. You can also register your details via our website.
Lara Weaver
General Manager
e. lara@dabsconsulting.nz
m. 021 230 5989
145 Kitchener Road, Milford
www.dabsconsulting.nz
