Industrial Property Market Report 21 | 31 July 2015

Industrial Property Market Report 21 | 31 July 2015

Macro-Office-Industrial-Retail Full Reports | Buy at www.turley.co.nz/News

Q1-2 2015 Report Notes
Prime commercial-industrial property values continue to firm whilst Hawke’s Bay subprime property performance trails.

Low and trending down interest rates if sustained will positively impact commercial-industrial property values resulting in probably firming cap rates/ investment values/ land values.

Ongoing rebuilding and strengthening provides economic stimulus and this also affects the buildings supply and redundancy equation.

Good level of new industrial buildings relative to soft economic.

Havelock North’s stature as a premium commercial-industrial property location continues to grow and also its increasing significance as an office location.

NZ economy commercial-industrial property effects will be assisted by a lower Kiwi dollar and lower interest rates but pulling against this is a confidence and dairy downturn. The elephant in the room is possibly Auckland residential property market risks for the economy.

Hawke’s Bay based Turley & Co is continuously engaged in commercial property analysis and valuation as a Registered Valuer and Registered Property Consultant.
Turley & Co since 1998 is a provider of high-quality property valuation and consultancy services nationally. 2009-15 as non-agency principal property strategist TCL project led property disposals of plus $27M and acquisitions plus $84M for private (corporate) and Council and Crown clients – since 1998 acquisitions-disposals nationally $455M.

Published 5 August 2015
CONTENTS
INDUSTRIAL MARKET INDICATORS FOR NAPIER | HASTINGS | HAVELOCK NORTH 3
HB Industrial Market | News | Quick Summary 3
Industrial Land and Rent Markets 4
Industrial Investment Market 6
APPENDIX 1 | DISCLAIMER & CAUTION 12

Industrial Market Indicators for Napier | Hastings | Havelock North

Industrial Category Rental Range
Gross | TOC

($/m²) Forecast Rental Growth Next 24 Months

(%) Yield Range

(%) Forecast Yield Change Next 24 Months

(%)
Prime
Secondary $55 - $85
$20 - $55 0 to +10%
0 to +5% 6.25-9.00%
9.00-13.00% -0.25%
0.0%

Vacancy Rates: - Industrial 5.0% - 15.0% estimate
Micro-locality considerations and quality dependant
Overall ~9.0% approx.

Inducements: - Newly-built 0 to 4 months rent free equivalent
Existing 3 to 8 months rent free equivalent
Depending on premises, term and tenant

HB Industrial Market | News | Quick Summary

Good level of new industrial buildings relative to soft economic conditions
Prime industrial property investments keenly contested
Industrial investment cap rates are widely divergent (relative to quality and tenancy considerations)
Ordinary or poor industrial stock vacancies are relatively high (Onekawa especially)
Bare industrial land supply good including Elwood Road consented 2014
Industrial land values mostly stagnant (possibly no longer declining)
Hawke’s Bay’s industrial property market like many is pushing against mostly low ebb activity in this sector
Continuation of reduced industrial occupancy Havelock North and Ahuriri with progressive increases Whakatu, Elwood Rd and Omahu Rd

Industrial Land and Rent Markets
Industrial Land
Hastings industrial development is concentrated at Whakatu, Elwood Road, Omahu Road or in Irongate and for Napier, predominantly at Onekawa, supplemented by major clusters at Pandora and Awatoto. Havelock North and Ahuriri industrial occupancy over the past decade has considerably decreased, yet progressively increased at Whakatu, Elwood Road and Omahu Road (and at some other localities).

There is considerable undeveloped industrial land in Hawke’s Bay, albeit less so in Napier (but with scope to increase this, including at the Airpark). Considerable industrial land remains tightly held or land banked, so much is currently unavailable for development. Council development contributions (levies) and other land development expenses are other significant market factors. In some locations the HDC cost will be a major hurdle for potential development. RMA reforms not yet confirmed could well have development cost moderation effects through lower land values.

There is industrial land for sale at Whakatu with much of this industrial zone locality being in productive rural uses still. Some land at Whakatu has changed hands in the past 5 years and since developed including Nimon Buses, East Coast Packaging, Amcor and Diamond Apparelmaster (and others). Whakatu like parts of Omahu Road has relatively high bare land services costs (includes development contributions). Two sales (July and August 2014), for similar size parcels reflect land values $66-77 psm, and a much larger lot sold January 2014 at $34 psm. A strategic Omahu Rd land/ property transaction was recorded in March 2014 at $1.8M (1.3 ha). The public record confirms no fresh major industrial land sales at Whakatu.

The 2012 proposed arterial by HDC to better connect State Highway 2 and Pakowhai Road at Whakatu, has the potential to elevate the importance and popularity of what is a centrally located to Napier-Hastings industrial and commercial precinct.

The ground leasehold Airpark of approximately 20 hectares is anchored by tenant ABB, occupying 6,500m2 of land developed with high quality research and development premises. Hawke’s Bay Airport is earmarked to upgrade its terminal as well as a new fire and rescue facility ($8m projection) taking up further Airpark land. This significant added layer of land supply for commercial and industrial uses will actively compete for locally-based and other tenants. The Airpark may well attract new businesses to the province.

The net effects for Napier-Hastings could be industrial property values containment or moderation including the land component of premises rent. If so this would be beneficial to Hawke’s Bay businesses and employment.

Major Napier industrial ground leasehold portfolio owners Corunna Bay Holdings and Iron Pot Investments took their lessor’s interests in 33 properties to the market in November 2014. Properties ranged from 550m2 to 5.3ha on various perpetual ground leases. 10 interests sold (predominantly over 3 sites), with the remainder taken back to the market with round two results unconfirmed. Refer to Turley & Co for lessor’s interests cap rates Metrix report.

Industrial Rent Values
We reported in mid-2008: Curbed industrial rental value growth is more likely over the next 12-24 months, if not a flat to declining market … This view holds still in mid-2015, with the exception of newly-built industrial premises at cost-led rents. Existing tenant rent reviews and lease renewal rents have in a lot of cases, rolled over without increase or minimal rent change (or reductions). Economic upside is still eluding most in the Hawke’s Bay industrial sector however, the outlook appears to be improving assisted by lower interest rates and a lower NZ dollar.

In summary: industrial premises good supply is mostly the case for Napier-Hastings, although very good quality industrial units are much scarcer. Competition for poor to average quality industrial premises tenants is considerable. Onekawa and Omahu have widespread vacancy and demand for existing premises is generally weak. Rents for most industrial accommodation remain off their peak and leasing-up periods can be quite long. The mentioned exception is newly-built industrial premises.

We note local manufacturing and pipfruit related industries fortunes have improved. This as an encouraging sign and coupled with moderating interest rates and a softer NZ dollar, we foresee Hawke’s Bay industrial premises demand improvement.

New Industry
The province’s industrial expansion has been mostly limited to existing operator growth including primary and manufacturing sector local firms who have capitalised on niche markets locally and internationally e.g. Furnware (Omahu Rd) and Havelock North Fruit Company (Cooper St).

New industry entrants include:
- One Pure, a water-bottling plant (with Resource Consent) in Awatoto.
- Auckland based company Fresco Nutrition is recently reportedly building a $30m spray drying and canning facility in Hawke’s Bay.
- Dannevirke’s re-use of the former freezing works by San Francisco Intrepid Semiconductor that will be positive for local the economy.
- Goat milk processing proposed.

The 2012-15 improving winery business landscape includes Delegat Group’s state of art multi-million dollar winery complex (under construction). The 13ha site on the corner of Evenden and Ormond Roads (adjoining the Napier-Hastings Expressway), will boast a 19,000 sqm wine-making facility. Villa Maria plans to construct a 16,000 sqm facility in the Gimblett Gravels region. A handful of other very recent multi-million dollar winery investments reflect a turn and viticulture sector fortunes. The former Corban’s site in Thames Street in new hands services a host of growers and vintners. Most winery developments are rural-sites located so these have not competed with urban industrial land uses.

Napier | Hastings | Havelock North Industrial
Sample industrial rents per Total Occupancy Cost (refer to TOC Definition later):

Property Date Area (m²) Rate $/m² TOC
Hastings Apr-15 1,750.0 $20.00
Hastings May-15 3,500.0 $25.00
Omahu Rd Feb-14 2,636.0 $59.64
Johnston Way Jun-14 3,668.0 $66.80

TOC rates cited are mostly for the principal factory/ warehouse/ dry-store component. The added value of offices, yard or parking components are separately analysed (these rates not cited here).

Refer to Turley & Co for information specific to a property and for Registered Valuer and Registered Property Consultant advisory www.turley.co.nz

Market rent is principally objective over subjective and is determined according to established valuation case law principles. Turley & Co Registered Valuer assistance should be preferred.

Industrial Investment Market
The trend toward higher-quality industrial development since the start of the millennium, has assisted the sector in Hawke’s Bay. Industrial property investment also increased in favour 2001-07 to the current day for well-tenanted good calibre properties.

The outlook for Hawke’s Bay industrial property is mixed. We continue to project land value and existing premises rental value growth for most Hawke’s Bay industrial property, is more likely flat 2015-16. The principal exception is well-leased and well-constructed modern properties. We sense the Hawke’s Bay industrial property tide is turning. The bright light is some very substantial new industrial developments and a good supply of affordable premises for industry.
Industrial Investment Transactions
Sample industrial property investment transactions include:

Location Price Date Yield
Mersey St - Jun-15 7.05%
Severn St $2,200,000 Apr-15 7.63%
Niven St $1,440,000 Sep-14 8.17%
Taradale Rd $2,050,000 Oct-14 8.30%
Johnston Way $3,685,000 Sep-14 8.30%
Thames St $1,750,000 Dec-14 9.90%

A majority of Hawke’s Bay industrial property sales recorded are for owner-occupied properties, redevelopment sites or for bare land. There is typically relatively modest turnover of purely investment industrial property. Since mid-late 2013 there has been increased activity. The broadly divergent yields today reflect adjustments for qualitative and risk factors (location, building physical, tenancy strength and lease duration).

Refer to earlier commentaries on Napier ground leasehold investment portfolio.

Refer to Turley & Co for information specific to a property and for Registered Valuer and Registered Property Consultant advisory www.turley.co.nz

TOC Definition

Gross rent or TOC (Total Occupancy Cost) rates cited in this report include primary tenancy outgoings: Council rates, building insurance and unique occupancy costs. Tenancy opex are excluded from TOC.

TOC rates reflect a sealed bare shell by deducting the estimated market added value of landlord fitout: flooring treatments, subdivision partitioning, air-conditioning, etc.

TOC rates are also net of car parking and possibly excess yard value and are often stated net of corner site added value.

TOC rates generally reflect effective rates so are adjusted for the value of known letting inducements (frequently a market feature in but often undisclosed).

TOC rate definitions apply for all sample rent evidence cited in this report. Reliable and rates safe interpretation requires Turley & Co Registered Valuer input www.turley.co.nz

Report Users Caution | Disclaimers

Report Users Caution
Please refer to the user terms and cautions Appendix 1.

Sources | Reliability
Turley & Co has been a valuer analyst or advisor for many of the cited transactions. We have otherwise gained data from thought to be reliable sources. TCL cannot guarantee the accuracy or reliability of all market data recorded in this report.

Caution | Sample Data
Rent samples are incomplete and include: dated existing and newly-built premises, ground and upper-floor, first-lettings and sitting-tenant agreements, properties of differing location strength, scale, lease content, seismic status, etc. These items are relative market value considerable influences. Without Registered Valuer assistance the value rates cited in this report may be incorrectly interpreted. The same caution applies for cited cap rates (yields).

Turley & Co Since 1998 www.turley.co.nz

Turley & Co is formed by a core team and currently employs six people. Pat Turley is a Registered Valuer and Registered Property Consultant. He has worked in three international property consultancies and has over 24 years of property consultancy and valuation experience principally focused on commercial and specialised property.

Pat began his work experience in property shortly after the crash of 1987 and has undertaken detailed appraisals for single property assets from $4,000 value to plus $100M in CBD Auckland. He is an experienced valuation arbitration and Court expert witness.

Pat Turley was Auckland based until 1995 before moving to Hawke’s Bay. He and wife Sue formed Turley & Co Ltd in 1998, which practices nationally.

Turley & Co services a loyal group of prime clients across the private, corporate and public sectors in New Zealand

Turley & Co is LINZ Accredited and a division of the firm is a longstanding preferred property acquisitions, technical and statutory services provider to Government and Council clients nationally including Ministries of the Crown.

Turley & Co in 2009-15 as a non-agency provider and principal property advisor project led disposals of plus $27M, and acquisitions of plus $84M, for private (corporate) and public (Council and Crown) clients – since 1998 acquisitions-disposals $455M nationally.

Turley & Co is continuously engaged in commercial property analysis and valuation as a Registered Valuer and Registered Property Consultant in Hawke’s Bay and nationally including Auckland property.

Please refer overleaf to a list of previously published research 1998-2014.

TCL RESEARCH1998
Publisher of market research papers 1998-2015 including:
Q1-2 | 2005 Hawke’s Bay Market Report - 1 Q1-2 | 2010 Hawke’s Bay Market Report - 11
Q3-4 | 2005 Hawke’s Bay Market Report - 2 Q3-4 | 2010 Hawke’s Bay Market Report - 12
Q1-2 | 2006 Hawke’s Bay Market Report - 3 Q1-2 | 2011 Hawke’s Bay Market Report - 13
Q3-4 | 2006 Hawke’s Bay Market Report - 4 Q3-4 | 2011 Hawke’s Bay Market Report - 14
Q1-2 | 2007 Hawke’s Bay Market Report - 5 Q1-2 | 2012 Hawke’s Bay Market Report - 15
Q3-4 | 2007 Hawke’s Bay Market Report - 6 Q3-4 | 2012 Hawke’s Bay Market Report - 16
Q1-2 | 2008 Hawke’s Bay Market Report - 7 Q1-2 | 2013 Hawke’s Bay Market Report – 17
Q3-4 | 2008 Hawke’s Bay Market Report - 8 Q3-4 | 2013 Hawke’s Bay Market Report – 18
Q1-2 | 2009 Hawke’s Bay Market Report - 9 Q1-2 | 2014 Hawke’s Bay Market Report - 19
Q3-4 | 2009 Hawke’s Bay Market Report - 10 Q3-4| 2014 Combined Market Report - 20
Q1-2| 2015 Industrial Market Report - 21 | this report …
Plus bi-annual Metrix single-page updates since 2012

TCL is a publisher of property market research predating 1998.
TCL continuously maintains an extensive private database of transactions/ valuation evidence.
Download from www.turley.co.nz/news

Hawke’s Bay based Turley & Co since 1998 is a well-established provider of high-quality property valuation and consultancy services. Registered Valuer, Registered Property Consultant and LINZ Accredited. The firm services a loyal group of prime clients across the private, corporate and public sectors in New Zealand.

Appendix 1 | Disclaimer & Caution

The information in this report is provided for general information purposes only, and is a summary based on selective information which may not be complete for your purpose. To the extent that any information or recommendations in this publication constitute financial or property advice, they do not take into account any person's particular financial or property situation or goals. Turley & Co recommends that you seek advice specific to your circumstances from your financial advisor and independent property advisor. Neither Turley & Co nor any person involved in this publication accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.
The purpose of this report is market conditions and transactions review, and oversight. No aspect of this report should be relied upon solely for any property or commercial decisions. Please refer first to Turley & Co for property case-specific written valuation or consultancy advice.

Whilst all property data represented is believed to be correct Turley & Co does not warrant the accuracy of information published in this report.

Turley & Co or its staff cannot accept liability for erroneous predictions (forecasts or projections) as no one can accurately predict the future.

Turley & Co or its staff cannot accept professional responsibility where Turley & Co has not been commercially engaged for a specific property valuation or advisory, or property strategy assignment. Turley & Co will only accept professional responsibility for client engagements involving property case-specific written advisory on TCL letterhead.

The assistance of a Registered Valuer or Registered Property Consultant should always be preferred www.turley.co.nz

Thank you.

ENDS

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