Having seen downturns in commodity prices which have effected both the dairy and energy sectors over the last three years, sentiment surrounding the Taranaki economy is rebounding on the back of higher dairy prices and recent announcements of a lift in exploration activity.
The latest Global Dairy Trade auction saw the average milk fat value reach US$3,387/ MT. The dairy price index has now risen by 110% since reaching a cyclical low in August 2015. In May Fonterra raised its initial forecast for the 2017/18 season to $6.50/kgMS. Should this prove to be accurate a vast majority of Taranaki farmers will run at a profit increasing spending power.
There has also recently been positive news for the oil and gas sector with TAG Oil recently announcing plans to spend $28.9 million on exploration, production and reassessment of old sites during the next 18 months at five onshore wells in the region. In addition Shell Todd has applied for two marine resource consents to drill offshore. Exploration activity is tipped to increase over the next two years.
Business confidence has been trending up over the last year according to the Taranaki Business Survey conducted by Venture Taranaki. In the latest May/June survey 45% of respondents expected industry conditions to improve over the year ahead.
Consumers have lifted spending with Venture Taranaki reporting total spending to have reached just short of $596 million over the second half of 2016 up 2.3% on the same period in 2015.
Retail spending is currently being supported by the wealth effect being created by a powerfully performing residential property market, which has seen the median house price in New Plymouth rising by approximately 14% over the last two years. The lift in sales activity has also elicited a development response which is underpinning the local industrial sector.
City Sees Transition
The opening of the Len Lye Centre has acted as a major catalyst for change at the western end of the City. The refurbishment of the White Hart Hotel which compliments the King and Queen Streets, along with the opening of a number of new cafes and restaurants has created a vibrant arts and hospitality precinct.
The appeal of the precinct is resulting in a lift in demand for office space within the area, with there being heightened activity within both the new build and refurbishment sectors, with end tenants ranging from small business start ups to government agencies.
Another change evident in the city is the transition in land use as demand patterns change. The most obvious examples being within Carrington Street where the sale of two substantial blocks of land, previously occupied by industrial users, has unlocked the potential for new residential development.
In the case of the ex Tenix Robert Stone site, which was sold in September of 2015 for a reported $2 million, resource consent for the change of use was obtained and subsequently the development of 19 residential lots has been progressed by developer Urban Aspect Limited and construction company Hassall Homes.
In early 2017 the second of the Carrington Road sites sold. It had been occupied for over 90 years by Cambrian Engineering. While the future use of the site has yet to be confirmed, its proximity to the CBD, Vogeltown and Pokekua Park would make it an extremely attractive residential proposition, albeit that the sites previous industrial use may result in the requirement for remedial ground works to deal with any contamination issues.
Development Activity on the Rise
Demand for new commercial and industrial space has elicited a strong response from the development sector over recent months.
Using building consent data as a proxy for development activity the graph below clearly illustrates the trend.
The value of consents totalled just short of $57 million in the year to May 2017 a total surpassed only once over the course of the last 10 years.
The industrial sector was responsible for the lions share of consents reflecting the demand being generated by businesses supporting the current surge in residential development. In the year to May building consents for the construction of 502 residential units were issued which contrasts with an annual average, since 2007, of 391.
The consents data relating to new builds does not however, tell the full story as a significant proportion of activity relates to refurbishment projects. As the graph above shows, activity within this sector highlights other areas of demand within the new Plymouth District.
Over the last two 12 month periods, office refurbishment projects have dominated activity, however work within the accommodation and retail sectors has complimented new build projects.
As outlined above the Demand for higher quality office space has resulted in a lift in development activity. While this demand has been evident for some time, the ability of the development sector to deliver new or refurbished product, at the standard required, was hampered by market resistance to the rental levels that developers needed to see from the end product in order to make schemes financially viable.
Recent lettings however, show that there is an acceptance by occupiers of higher rents should the office space on offer fully meet their requirements.
For some time the upper end of the rental range was capped at approximately $285/m2 recently however, Wallace developments developed, on a design and build basis, a new office premises for FMG and Forsyth Barr. The rent achieved was in the region of $310m2 thereby lifting the upper end of the rental scale.
The largest new build project underway is the construction of premises for the Ministry of Social Development ion the corner of Dawson street and Devon Street west. Upon completion the Ministry will vacate the Gill Street premises it currently occupies. The move showcases two of the major trends driving the New Plymouth market, the demand for higher quality accommodation and the drift westward.
Another emerging trend evident within the market is a lift in demand from start up companies involved within the creative and IT sectors, This demand is being met, in part, through the development of shared space and Co-working operations.
The two concepts provide the opportunity for complimentary companies to lease dedicated desks or space while benefitting from the ability to share common areas such as lounges and break out areas which fosters collaboration and innovation. Two examples of this approach being delivered in New Plymouth are Manifold, located on Devon Street West and the Egmont Business Centre.
Manifold allows for flexible working arrangements. Companies can choose to lease desk space on either a long term basis, with rentals of approximately $470 per month, or alternatively hot desk on a monthly, weekly or daily basis. The daily charge for a desk being approximately $35.
The Egmont Business Centre offers flexible office space from 10m2 within premises which were opened in May 2017 following an extensive refurbishment and upgrade.
While as detailed above, there is demand for higher grade space, levels of tenant inquiry decline significantly for secondary quality premises. While therefore occupancy levels are high within prime offices vacancy rates have increased within the secondary sector, particularly within premises which have low seismic ratings. The relocation by the Ministry of Social development will obviously add to vacant office stock.
As highlighted above total retail spending with Taranaki has risen over the last year. Analysis of sales trends conducted by Venture Taranaki show that within New Plymouth, food retailing accounted for 34% of all spending. The greatest growth, over the last 12 months however has been within the appliance and accommodation sectors. The latter reflecting the impact of the rapidly expanding tourism trade.
Generally the retail leasing market has been relatively subdued over the last two years with vacancy within secondary locations increasing. Within the prime Devon Street retail strip (between Egmont and Gover Streets) occupier demand is still high. A point in time vacancy survey, conducted by Bayleys Research within the area found vacancy to be at approximately 8.5%.
The combination of changing shopping habits and competition from e commerce has, in line with other centres across the country, resulted in an increase in vacancy within secondary shopping strips within the City. The challenge is to find new uses for buildings within traditionally retail orientated areas. Conversion to residential use has the combined benefits of finding a fresh use for the building while also increasing the inner city population which assists in achieving the vibrancy which local business and the Council desire. Alternatively commercial office use can also be successful. An example of this approach proving successful is the ex Ski and Sports building at 99 Devon Street West. The ground floor has been refurbished and converted to office use. The fit out incorporates a number of green features including solar panels and extensive planting. The building has been leased to IVHQ.
The retail property investment market has remained active albeit that the yields commanded are highly dependant upon the location of the property, the calibre of tenant and the property’s seismic rating. By way of example 137 Devon Street East, occupied by Cash Converters, sold in November 2016 for $1,200,000 equating to a yield of 6.86%, which was, at the time, the lowest achieved for a New Plymouth commercial property. By comparison a property occupied by a $2 shop operator which had a low seismic rating sold at a similar time at a yield of approximately 13%.
The sharp increase in both residential and commercial property development activity witnessed over the last two years has seen demand for industrial property increase’ lifting rental values, which had, following the downturn in activity within the energy sector, been flat for some time.
The lift in demand has, as discussed earlier, elicited a response from the development sector, which has in turn seem greater competition for development land, again pushing up values. Prime industrial land now commands values of up to approximately $150/m2.
Once again, investors remain active within the sector albeit that given the fact that property is tightly held, only a limited number of premises are brought to market. Competition for the limited stock available however has seen yields tighten over the last
12 -24 months. By way of example a property at 67 De Havilland Drive, Bell Block, occupied by Gough Cat sold in January 2017 for $2,675,000 equating to a yield of 7.2%.
Tourism Boom, Impact Being Felt
New Zealand’s tourism sector is experiencing its greatest ever lift in activity. The number of international tourists over the year to March totalled 3.68 million an increase of 10% over the last year. International tourist spend now sits at an annual total of just over $10 billion.
The lift in tourism activity is being felt within Taranaki, with further impetus being added to the local industry following the announcement that the world’s largest independent guide book publisher officially judged Taranaki the 2nd best region in the world to visit in its Best in Travel 2017 publication.
Total visitor spending in the year to May 2017 totalled $ 348 million an increase of 13.5% over the last two years. Over the same period international spending increased by 21.5% to $79 million bolstering the retail, hospitality and accommodation sectors.
The accommodation sector has responded over the last two years through redevelopment and new build projects aimed at meeting the demand for higher quality accommodation. The largest single addition being the development of the 85 room Novotel hotel on Leach Street which opened in December 2015.
State Highway 3 Improvements to Support Region
In May 2017 The Ministry of Transport launched the Awakino Gorge to Mount Messenger Programme. The $135 million programme, part of the Government’s Accelerated Regional Roading Programme, is aimed at improving safety, resilience and efficiency along State Highway 3.
A better highway that connects Taranaki and the Waikato will potentially boost economic activity in the region. It will also support the region’s growing tourism appeal, the primary production and processing industries and the oil and gas sector.
At present a consultation process is underway in order to finalise the route of the Mount Messenger Bypass. Five different options have been identified and it is anticipated that an announcement about a preferred route option for Mt Messenger will be made over the next few months.