How the strain on Auckland's infrastructure could benefit the regions

The chronic strain on Auckland’s infrastructure could be a boon for regions as commercial investors turn their attention to buying opportunities in the provinces. 

The steady upward march of Auckland real estate prices and the city’s chronic ­congestion are starting to look like a regional development policy by stealth.

As long as New Zealand continues to look attractive compared with most of the rest of the world, enticing both Kiwis and foreign migrants to live here in ever-growing numbers, the outlook for the regions should be rosy simply by virtue of Auckland’s ­inability to take the strain.

If that all sounds a bit pollyannaish, meet Troy Bowker, the imposing Wellington ­property investor whose ­private-equity vehicle, Caniwi, has up to $200 million to spend on commercial and industrial property. No one less like Polly­anna are you likely to meet. The former merchant banker is relentlessly commercial and would look terrible with a bow in his hair.

Bowker’s money is on the regions. “We’re going looking in the provinces,” he says. “Provincial New Zealand is going to be a very good place to invest in the next 12 months – places like Taranaki, Tauranga, Hawke’s Bay, Dunedin, even Palmerston North.”

There are three key elements to his approach:

First, he’s looking for long leases with stable tenants. Other property plays have included student accommodation in ­converted commercial space in Wellington and 25-year leases on chicken-rearing ­facilities owned by the Tegel and Ingham poultry empires.

Second, his pockets are a little deeper than the average New Zealand commercial property investor. “In the property sector in the provinces, anything between one and five million [dollars] gets snapped up if it’s a good asset,” says Bowker.

“But if you’re in the $10 million-plus category, and in some of these places we’re at $30- to $40 million, there are very few buyers, so your competition is extremely limited. For the right assets in the right ­locations, there are good buying opportunities.”

Third, and crucially, interest rates have recently bottomed out and are on the rise, as is inflation.

Although the Reserve Bank may not intend increasing its benchmark Official Cash Rate for at least a couple of years, the rates that New Zealand banks can offer ­borrowers have been on the up since late last year as the funds they raise overseas become more expensive. As that happens, leases that link rents to inflation will protect landlords, and higher interest rates will reduce the pool of investors available to buy large-scale ­commercial property.

That may not make a lot of difference in cities such as Auckland, where rental yields have been compressed for seven or eight years as rising prices have outstripped the capacity of rentals to keep up.

But in regional New Zealand, where Jones Lang La Salle national research manager Tom Barclay says there is “at least 100 basis points difference” in yields compared with Auckland – that’s about one percentage point higher – investors with the right risk appetite and bank relationships are likely to remain active. “They’re a riskier prospect than Auckland,” says Barclay, because there’s less demand than in Auckland from would-be tenants, “but attention is being diverted” to regional property.

For Bowker, it’s a simple equation: ­“Auckland is overpriced and over­populated. Its infrastructure is incapable of standing up to the population growth. It’s got terrible, terrible transport in and out of the city. Let alone the city, you can’t get five kilometres from the airport in half an hour,” he says.

“In the likes of Taranaki or Hawke’s Bay, you can get to the airport in five minutes, the weather’s fantastic and the lifestyle’s amazing.”

The missing factor is employment, but he is taking a punt that will change as an increasing number of people and businesses start abandoning the expense and frustrations of Auckland. “I think the future of New Zealand provinces is very, very bright,” he says.

“I’m not necessarily talking over the next 12 months. I’m talking over a period of time. The investment horizons we’re looking at are intergenerational, 25-year time horizons.”

Chris Dibble, director of research and consulting for Colliers International, sees the same trend among “cautious, competent investors” in an environment where interest rates and inflation are rising. “They’re making sure they’re getting value for money and looking outside the traditional hotspots. The regions are obviously experiencing an overflow of positive activity outside the main centres.”

A simple comparison drawn from a mass of Colliers research shows how: the firm projects average yields on Auckland commercial property of 6.8% this year, against 8.6% on Dunedin property. That difference may not look like much, but expressed as a rate of return on millions of dollars invested, it’s worth a small fortune and makes Dunedin a far more attractive proposition.

Although international investors are active in the New Zealand market, they comprise only about 10- to 15% of the commercial and industrial property market by both transaction volume and value, Dibble says. That trend jumps around – some $2 billion of one-off investments from overseas made 2014 an anomaly. In 2015, there was a lot of activity by property groups listed on the New Zealand Stock Exchange and last year saw a surge in activity by New Zealand-based investment syndicates.

Dibble says they “expect more private-sector activity this year [from] experienced investors – the ones that have the ability to access credit and lending in this market”, as banks respond cautiously to a more costly borrowing environment.

Bowker is not totally against big-city investments. In Wellington, he sold a fully tenanted office block in October last year, less than a month before the Kaikoura earthquake struck, damaging it. While acknowledging that was a lucky escape, he’s pretty sure there will be good buying for those with an appetite for earthquake risk.

The quake knocked out a large number of Wellington office buildings, sending tenants scrambling for new space in what had been a fairly oversupplied market. As many as 16 building sales were cancelled post-quake, Bowker says.

“Of those deals, how many of those guys who were selling, had to sell, and haven’t will come back to market? I would say quite a few. This is exactly the environment where opportunities come up.”

This article was first published in the March 4, 2017 issue of the New Zealand Listener. Follow the Listener on Twitter, Facebook and sign up to the weekly newsletter.