Commercial Property Leads The Way
Commercial Property with Andrew Hiskens
Andrew Hiskens, Colliers International’s North Shore Director, reviews the qualities of commercial property in recessionary times, and how it has led the way as an asset class over
the medium term:
Cycles
The extended growth cycle, which ended abruptly with the onset of the Global Financial Crisis (GFC), underlines how difficult cycle predicting has become.
If the last ‘big’ peak was in 1987, brought to an end by the GFC of its day, and the last ’deep’ trough was in say 1992, with the next real peak not until 2007, we can see how wobbly the cycle had become. Five years to the bottom, but fifteen back to the top.
In New Zealand, cycles have been harder to detect than in other typically larger countries. However, our research suggests that industrial property cycles are somewhat more predictable than CBD office cycles. This has something to do with simplicity of construction and development of industrial property, and the fact that they are typically built to order.
Our records suggest that the scale of rental decline has slowed in Auckland. Therefore, in terms of year on year growth, which is one measure of cyclical change, we have reached the trough. If this proves to be correct, then like the last cycle we have had a very quick downhill run as it was only three short years ago that rental growth peaked.
When this pattern is combined with known certain or possible additions to the stock, we conclude that a recovery period (trough to peak) of a longer duration than the short peak to trough we have experienced – measured in terms of growth rates rather than actual rentals and capital values – is inevitable. Just like the last cycle.
Commercial Property versus other asset classes
Direct property investment traditionally sits towards the higher end of the risk/return spectrum in comparison with other asset classes, typically providing higher returns than cash or bonds but with more volatility. Equities are riskier than property but can provide high returns.
Total returns from direct commercial property are made up of income or rental returns, plus a return component based on change in capital value. While the capital value component has clearly been highly volatile of late, it is worth remembering that income returns have been quite stable and over time have been very good.
The Property Council of New Zealand and Investment Property Databank (PCNZ/IPD) index for the 15 year period from December 1994 to December 2009 shows income return overall across all of the properties in the database has been slightly over 9% per annum.
By comparison, a 10.6% pa long term total commercial property return is pretty damn good. The NZX all equities would have given you 7.6% total return, and bonds would have provided an overall total return of 7%pa (ANZ New Zealand All Government Stock All Maturities Index).
Email: andrew.hiskens@colliers.com
Dedicated dentists
