Commercial Property-Mid Year Review

Posted on Wednesday, July 4 2012

As we head into the winter months, the term which would seem to sum up the commercial property market is patchy.
There are certainly encouraging signs in certain sectors and in certain centres (Auckland is noticeably to the fore again), but there is no sense of an overall recovery taking place.
Landlords are still having to offer significant incentives to attract new tenants. Overall, the figures suggest that vacancy levels are stabilising throughout the country and this is long overdue.

Rent reversion has been a feature of the market since 2008, with landlords being prepared to lower contract rentals to either retain or attract tenants. The alternative of having an empty building is not too appealing as most commercial landlords are in it for the cash flow.

The provincial centres are doing it hard with increasing vacancies in the CBD’s in the face of competition from the malls. Interestingly though, the malls themselves are not having it all their own way. A report by David Fickling and Nichola Saminather states that Australia’s biggest shopping centre operators, Westfield Group, Stockland and GPT Group, are lowering rents for new stores while existing tenants call for cuts as major- mall sales drop for the first time in decades.

Myer Holdings LTD, the nation’s largest department store chain, will close as many as a quarter of it’s outlets as leases expire if rental costs aren’t cut.

Premier Investments Limited, the largest operator of small stores, is closing 50 shops and seeking lower rents at remaining sites that pay triple ‘The Gap INC’s’ estimated average global rent.
‘The pressure is going to mount on landlords’ said Tony Sherlock, head of property research at Morningstar Inc.

‘Landlords are able to replace existing tenants, but the new tenants may not be willing to pay the same rent’.
Stockland, Australia’s biggest diversified property trust, cut rentals by an average 21% in the six months to the end of December 2011 for the ten stores that replaced tenants who went into administration.

Australia’s A$240 billion retail industry is pinching pennies as households increase saving to double the U.S. rate and the Australian dollar’s 23% surge in the past three years drives purchasers online.
Consumer sentiment has been negative for eight out of the last eleven months according to a survey by Westpac Banking Group and the Melbourne Institute.

Online spending by Australians rose 15.5% in the year to April compared with a 4.1% increase at stores according to a May 28 report by National Australia Bank LTD.

Landlords can’t allow spaces to stand empty in the malls for fear the downbeat appearances will dent revenue at neighbouring stores, starting a chain reaction according to Michael Lonie, NSW state director of the National Retail Association. He states that, ‘If you’ve got too many dark spots you’re in trouble. It’s like a dog with fleas, if you don’t treat it, it will turn into mange, and once it’s got mange its hard to recover’.

So the problem is not unique to the New Zealand market. The outgoing CEO of Fletcher Building, Jonathan Ling, probably said it best when he stated that we are at least four to five years away from any meaningful recovery in the New Zealand property market.
In the interim, Landlords simply have to accept that power has shifted to the tenant and those who don’t will simply be left with empty buildings.

We have always taken a very long term view of our investments and know that, eventually, this terrible phase of the property cycle will pass. The key is to adjust and survive it.

 

D.J. McMahon
Managing Director
McMahon Commercial

Commercial Property Investment 2012

 

 

 

 

 

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Denis McMahon

Brought to you by Property Managers Ltd: Pacific Property has been formed with the aim of building, over time, a diversified portfolio of Industrial, Retail and Commercial properties to provide strong sustainable returns to investors which will be managed by experienced property manager, Property Managers Limited (PML). The directors of Pacific Property Fund are Denis McMahon and Philip Tushingham, who together have over 45 years of experience in investing in, and managing commercial properties. “Pacific Property presents an opportunity for investors to invest in a brand new quality industrial building in Mount Maunganui and to join us as we build a quality commercial property portfolio diversified both geographically and across industrial, retail, and commercial assets.”

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