Changing Economic Backdrop
Taranaki has enjoyed strong economic growth over recent years driven by the dairy and oil sectors. The region’s GDP expanded 47.5 per cent during 2007-2013, well above the national movement. Latest figures show that Taranaki contributes 3.9 per cent of national GDP, provides 2.5 per cent of national employment and is home to 2.5 per cent of New Zealand’s population.
Over the last 12 months however the dual drivers of the regional economy have slowed considerably as commodity prices have fallen. The loss of yearly income to Taranaki farmers alone has been estimated to be $736 million. No new oil or gas exploration ventures are planned for Taranaki over 2015.
Economic cycles such as that being experienced in Taranaki are not unexpected in commodity driven economies albeit that the simultaneous decline in prices of both of the region’s major export products clearly compounds the problem.
While in the short term therefore, businesses must take steps to manage their way through a period when cash flow will be constrained it is also important that they look to the longer term future. Commodity prices will recover and businesses must ensure that they retain key staff and are well positioned for the next upturn in business activity. Both national and local government must also play their part ensuring that local infrastructure is fit for purpose and supports business expansion in the area.
With regard to transport infrastructure, it is pleasing to see that significant investment has been allocated to the highway network and airport. New Plymouth District Council has also published a blueprint setting out its key objectives for the district over the next 30 years, highlighting issues such as how best to support strengthening of the rural economy, growing new economies and planning for change in New Plymouth’s CBD to ensure it develops as a thriving city centre.
The impact of the downturn in the local economy on the local commercial and industrial property sector will depend upon how long low commodity prices persist. To date there has not been a significant lift in vacancy however, there has certainly been a reduction in capacity use which will cap rentals until the next uplift in the economic cycle.
The prime end of the office market has been dominated over recent years by the energy and engineering sectors. Expansion of companies involved in the above sectors drove down vacancy rates, particularly within the favoured higher quality, low rise premises. As a result rental growth within this part of the market was evident throughout the 2012-2014 period.
Unsurprisingly, as the energy and engineering companies have reduced staffing levels, the result has been an increase in the number of vacant office premises being brought to market.Adding to the drag on the market is the significant growth in the amount of spare capacity within office buildings. This “shadow vacancy” in addition to the quantum of totally vacant space will cap rentals as new demand which arises when the local economy improves will be largely absorbed within the premises which companies currently occupy.
Vacant space is more evident within the higher rise towers and within offices with low seismic ratings. In the latter case while the cost to strengthen buildings can be high, landlords need to weigh this against the increased likelihood of vacancies or the need to accept discounted rents in order to attract tenants. There are examples of local investors who have taken the decision to strengthen and upgrade buildings, including high quality fit outs, benefitting from being able to command higher rentals or to negotiate longer lease terms with sitting tenants. The case for committing funds has been strengthened by the low interest rate environment that currently exists. With some investors deciding that they can generate a higher return from increased rents, resulting from upgrading their properties, than they can from depositing funds.
As is the case in many town centres, traditional retail businesses have come under pressure as a result of competition from bulk retail centres and changing shopping trends such as e-commerce. The impact is particularly stark within secondary strip locations and, as with offices, within buildings with low seismic ratings.
Within Devon Street’s prime strip (between Egmont and Gover Streets) vacancy rates fell at the date of the latest survey conducted by local valuers Hutchins and Dick. As at April the overall vacancy rate within the area had fallen to 5.0% from 7.2% a year earlier.
Once again there has been a growing disparity between the rents commanded by well located premises fitted out to a high standard and older premises.
The bulk retail sector has performed well with rents having firmed since early 2012 with vacancy rates at low levels.Demand for high quality retail investment stock remains, albeit that little is brought to market. The recent sale of the Bunnings building on a sale and leaseback basis is a good illustration of market demand. The property sold for $5,300,000 at a yield of 7.4% approximately four years after its previous sale when the yield reflected was 8.2%, although it should be noted that significant upgrades have been completed in the interim.
Further illustration is provided by the sale of the Carters’ Building in Egmont Road which achieved a sale price of $6,250,000 representing a yield of 7.68%.
The demand for modern well located premises has resulted in an increase in new building activity as illustrated in the graph below which charts resource consents issued for shops, restaurants and bars within Taranaki.
The total floor area consented in the year to March 2015 stood at 6,940m2, the highest figure recorded since the third quarter of 2011 and the third highest since March 2009.
Taranaki IndustrialThe downturn in engineering activity is evident within the industrial sector with levels of sales and leasing activity down since mid 2014 following two years of above average activity over 2011-2013. The impact of the slowing in the local economy is illustrated by a dip in construction activity. The number of consents issued for new factories and storage facilities across the Taranaki region fell to 43 in the year to March 2015, down from 69 in the 2013 calendar year and approximately 100 in 2006.
As with the other major commercial property sectors it is the secondary quality market which has experienced the largest slide in demand.
Despite slowing activity, analysis of land sales within Bell Block and Waiwhakahio, conducted by Hutchins and Dick suggests that land values are holding, having risen over the course of 2014.
Investment demand remains robust with yields again holding, having tightened between 2012 and 2014 as evidenced by a January 2015 sale of an 810m2 showroom/warehouse located in Hurlstone Drive. The property was occupied by Chesters Plumbing and Fonterra Brand and sold for $1,190,000 at a yield of 8.25%.
Infrastructure Improvements to Support Growth
While the economy has softened it is important that critical infrastructure be maintained and improved in order to support future growth.
It is positive therefore that work has begun on roading improvements and plans have been put in place for further enhancements within the National Land Transport Programme (NLTP) (2015-2018).Under the NLTP it has been announced that funding has been made available over the next three years for continued investment in improving State Highway 3 heading north from New Plymouth.
In addition safety improvements between Bell Block and Waitara are a high priority for the Transport Agency.
The programme also provides funding for the completion of the Vickers to City project, which will dramatically improve journeys in and out of the city and provide additional capacity with new bridge crossings at Te Henui and Waiwhakaiho.
Investigations are continuing for improvements on State Highway 3 between Awakino Gorge and Mount Messenger and a package of activities to improve safety, passing opportunities and incident management will be rolled out over the next three years. The project has been brought forward by the Government’s Accelerated Regional Roading Package, which has also enabled construction to begin on the SH3 Normanby Overbridge Realignment in South Taranaki.
New Plymouth airport is the ninth busiest in the country with it currently being used by approximately 343,000 passengers a year. It is forecast that this number will increase to, in excess of, 550,000 over the next decade.
An $11 million expansion of the terminal has recently been announced with work anticipated to begin in early 2016 with completion set for mid-2017. The upgrade will provide for floor space within the terminal to increase by 60 per cent, from 1,480 square metres to 2,300, there will be more room for aircraft on the apron and more car parking.
The Koru Lounge will double in size, baggage claim will move to the other end of the building, there will be separate arrival and departure points, more retail and cafe space and a passenger security area, if needed, in the future.
The project is part of a $20m master plan which also proposes to extend the 1,310m runway to 1,500m, at a cost of $3.3m, or to 1,700m at a cost of $9.6m in the coming years.
Speciality retail, residents and precincts to drive vibrant CBD
As noted above vacancy rates within the CBD’s secondary locations have increased over a number a years as shopping habits have changed. This situation is not unique to New Plymouth, indeed it is reflected in many provincial centres across the country. In many cases it has become evident that CBD’s in their existing form are too large and plans are being considered to reconfigure them through creating a more compact core and by encouraging residential development in order to create a more vibrant central city which better meets modern day requirements.
Within its District Blueprint the New Plymouth District Council is considering many such initiatives for New Plymouth. Within its consultation summary it has sought feedback on a number of plans, many of which have subsequently received support from the local chamber of commerce.
The chamber was particularly enthusiastic about the proposal to establish the central city as the specialty retail hub for the district and region.
There was also significant support for providing the opportunity for more people to live in the central city. In this instance it was felt that it was an opportunity to enhance the city’s vibrancy.
The development of precincts such as an arts or justice precinct has also received a measure of support albeit only around areas where they are already naturally occurring i.e around the Len Lye Centre and Puke Ariki.