The industrial sector consists of several sub-categories including warehousing, storage, logistics and manufacturing. This is the sector we believe will see the least impact from COVID-19 from a property investment perspective and will continue to be the asset class of choice for many investors.
Leading up to COVID-19, our industrial property markets were the go-to sector for investors across the country, with record prices and yields being achieved for well-located buildings tenanted by quality companies.
Overseas there are recent examples of warehousing and logistics assets being in high demand as online shopping increases and essential services such as supermarkets require additional storage space. An example of this is US Equity firm, Blackstone, agreeing to buy a portfolio of logistics sites across the United Kingdom for 120 million pounds in March of this year.
We see this as a growing trend in New Zealand, with an increased presence and demand for online shopping due to COVID-19 and the resultant increase in demand for logistics and warehousing space.
In the short to medium term, and when the country returns to Level 2, we expect some softening of yields across the country but continued strong investor demand for quality industrial buildings that have robust lease covenants and with a focus on storage, warehousing and logistics buildings.
Investors that have property tenanted by retail and hospitality businesses will need to ensure that they are a little more circumspect and do their best to negotiate a win-win agreement with their tenants regarding their rental.
The retail sector is potentially going to be hit the hardest by COVID-19. Retailers, unless they are deemed an essential service, cannot operate their business under the lockdown and it will take time for their business to return to some degree of normalcy after the lockdown ends. Once retail shops are reopened, shoppers are likely to remain conscious of social distancing and wary of COVID-19.
In the short to medium term post COVID-19, we expect to see increased vacancy and a potential softening of rentals. Vacant space will take longer to lease than it did pre COVID-19 and increased incentives will need to be considered in order to secure new tenants. From an investment perspective, their will likely be a softening of yields for properties that have a retail component.
Tourism has been one of the main contributors to our gross domestic product (GDP) generating $16.2 billion, or 5.8 percent of GDP, for the year ended March 2019 (Tourism New Zealand). This sector will feel the full brunt of Covid-19.
With our borders closed and the sector reliant on inbound tourism, occupancy numbers in our hotels and motels will be significantly reduced and our bars, restaurants and entertainment venues will be less frequented, particularly in tourist hot spots of Auckland, Christchurch, Rotorua and Queenstown.
The RevPar levels, a metric used in the hospitality industry to measure hotel performance, will decrease for hotels and motels across the country as well as other hotel revenue generators such as associated restaurants and bars.
This will be further exacerbated by the significant downsizing of Air New Zealand and the loss of revenue from cruise ships that visit New Zealand ports which generated $306 million in 2016/17 according to Statistics NZ.
Some operators won’t survive the downturn, resulting in issues for investors as properties look for new operators. Hotel and motel occupancy and dollar spend will be down significantly, leading to reduced returns to investors, including investors who have purchased units that are part of a hotel pool. Overall asset values are also likely to decrease.
Post COVID-19, commercial property will continue to be a sound and sought-after investment, but investors will need to be clear about their investment objectives and strategy and understand what level of risk they are prepared to take. Lastly and as with any potential investment, investors need to undertake sound due diligence. Post COVID-19, this will become more important than ever.
Tony Kidd is the General Manager of
NAI Harcourts, New Zealand. NAI Harcourts is the commercial trading division of Harcourts Group, New Zealand’s largest real estate group.
Tony has over 30 years’ experience in the property industry in New Zealand, the Pacific Islands and the Middle East. His experience covers expertise in areas of valuation, property management, agency and property investing.
This article featured in NAI Harcourts Market Leader Issue 2, 2020