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Recession punishes property market

Over the past 18 months, Auckland CBD vacancy rates have increased because of a combination of falling demand for office and retail space.

Tenants are looking to sublease or are just downsizing. Many are not renewing leases, fuelling vacancy rates. This is an important gauge to determine the supply and demand of space, which ultimately sets the price for rentals.

The impact of the recession on the property market is likely to roll over to next year and the completion of new buildings may cause more vacancies, pushing prices down further.

Auckland vacancy rates were at 13.30% in March and this is projected to worsen in the next 12 to 24 months depending on the recovery.

Another crucial impact on commercial property is the export and farming industries.

When the farming and tourism sectors do well, the property sector receives a boost as funds are distributed through the local economy.

It is important to note that this does not happen straight away, but takes up to a year to filter through. People use surplus funds to invest in property.

Supply and demand for commercial property is driven by three main factors, namely, residential interest rates, unemployment and immigration. These are inter-connected and impact on each other.

Unemployment

Traditionally, unemployment leads to reduced spending in the economy, aggravating recessionary conditions. This has a direct impact on property.

As businesses lose revenue, they lose confidence and reduce staff lost. This in effect means they would need less office and retail space and hence vacancy levels increase.

Areas of unemployment usually have a decreasing population and when this occurs, existing retail and office space suffer.

It is a vicious cycle, one that is not good for commercial property investors.

Unemployment also causes welfare payments to increase, affecting the property market and availability of money in the economy.

Interest rates

Interest rates have been low over the past year, providing the much-needed stimulus to the world economy. However, this may change as the Reserve Bank of New Zealand begins to increase rates.

If interest rates reach 8% to 10%, many highly geared investors will have no choice but to sell. There could be a rush of forced sales and dumping of property from over-geared developers and investors.

This will create more opportunities for smart and experienced investors, although it may also lead to an oversupply of commercial stock, and drive values down.

We have enjoyed strong population growth over the past four to five years, this has directly impacted the property market, as demand for goods and services increase, and people look for businesses to purchase or take up vacant space.

Negative population growth could have a damaging effect on property, as this will slow the recovery process and demand will evaporate.

Auckland is the main location where a majority of new immigrants settle because of job opportunities and social networks. This will benefit the local property market.

Mahesh Ranchhod is a Director of the Ranchhod Group of Companies based in Auckland. Phone: (09) 3031353 Mobile: 021525569 Email: m.ranchhod@xtra.co.nz

The Group incorporates New Zealand and Australian Companies and Trusts designed to invest in commercial properties and manage them on both sides of the Tasman. The above article should be taken only as a guideline and not specific advice. Mr Ranchhod absolves himself along with the management and staff of Ranchhod Group of Companies and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.

www.ranchhodgroup.com

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