Transaction market showing signs of life

Recent commercial property sales activity shows signs that investor confidence and sentiment is returning.

Following a subdued 12-months in the transaction environment, activity is beginning to ramp up again. It has been encouraging to see an increase in volume of available assets across our target sectors and locations, creating opportunity for investors.

Pricing levels and yields for recent industrial and large format retail asset sales are consistent with, and in some cases keener than, those evidenced in our valuation round on 31 March 2023.

This has made for a busy first quarter of the 2024 financial year, with an excellent result achieved for Oyster Industrial Limited (OIL) investors via two successful divestments. Several acquisition bids, that while unsuccessful, provided strong indication of investor demand.

Industrial and logistics

The industrial and logistics sector continues to retain its investor appeal due to its strong defensive qualities and sound occupier fundamentals, which have continued to drive rental growth.

Several industrial sector transactions in Q1 of FY24 demonstrated the ongoing ability of this asset class to provide stability against a backdrop of economic uncertainty.

Two divestments from the Oyster Industrial Limited portfolio delivered yields below 5 per cent, a strong result in changing market conditions, clearly illustrating the defensive nature of this asset class.

101 McLaughlins Road was marketed by CBRE to strong interest, with five offers received at campaign close. The sale price of $19 million represented a 4.6 per cent premium to the Fund’s initial October 2019 purchase price.

An unsolicited offer was received on 12 Harbour Ridge Road. Its subsequent sale price of $15.25 million represented a 17.3 per cent premium to the Fund’s initial purchase price in October 2019.

Our conviction in industrial property was again reinforced by our recent participation in the sale process for three quality industrial assets in the wider Auckland region.

Two of the three assets sold to other bidders at keen prices – a South Auckland property representing a return on passing income of 4.2 per cent; and a North Shore property transacting at a 3.3 per cent return on passing income. Both assets sold with short-term tenure.

Both assets were marketed with near-term rent growth opportunities by way of lease expiry and the ability to unlock a higher rent.

Large format retail

Following its resilient performance during COVID-19, the large format retail sector continues to be characterised by strong occupier demand, limited tenancy turnover and very low vacancy levels.

In Q1, Oyster participated in the bidding process for a large format retail development in Royal Oak, Auckland, which was successfully purchased by another bidder at a yield firmer than 31 March valuations would suggest.

This result highlights the strong transaction potential of this asset class and demonstrates there is keen interest in multi-functional spaces with strong anchor tenants, a positive outcome for the five large format retail assets currently held within the Oyster portfolio.

Quality office

We continue to see evidence that New Zealand and the wider Asia-Pacific region is not experiencing the
‘death of the office’ phenomenon impacting some other markets, particularly the USA.

There is ongoing tenant demand for quality Auckland CBD office space in and around the downtown waterfront area, as well as for well-located office parks proximate to transport links and providing good amenities.

We see opportunity to capitalise on buildings with existing vacancies in strategic Auckland CBD locations through repositioning and upgrading. Accordingly, Oyster has been an active participant in several bids for quality Auckland CBD office assets in recent months, which have demonstrated a marked uplift in pricing for this sector.

Transacting for optimal investment returns

The Oyster investment strategy is focused on strategically located, quality assets, that provide strong leasing potential, at prices that support optimal long-term investment returns.

With activity in the market continuing to improve, we note that pricing may become more competitive given the level of interest in our target sectors from alternative capital sources in the market, including private wealth.

As the property cycle turns, we will continue to proactively seek out transaction opportunities that meet this investment criteria and will keep investors informed of opportunities as they arise.