Where are Wellington yields at today?

According to Property Guru data on industrial and commercial sales over the last 12 months, there has been only one recorded sale of an office building in the Wellington CBD. Since a single sale cannot provide an accurate yield guideline, we need to look to the industrial sector, where the volume of transactions offers more reliable data.

Recent sales indicate that properties with a three-year lease term are generally selling at yields in the 8% range, while those with five- to six-year lease terms are around 7%.

A clear example of how yields have shifted since the market peak in 2021 is the recent sale of 1 Port Road, Seaview, Lower Hutt. This high-profile property recently sold at a yield of approximately 7% with a new six-year lease to Motion – an American-owned blue-chip company (www.motion.co.nz) with more than 25 branches throughout New Zealand.

Notably, this same property sold in October 2021 at a 5.2% yield, with a four-year lease to Kitchen Studio.

For this property to maintain its 2021 value today, the rental would have needed to increase by approximately 35% over the past five years ​to offset the rise in yield from 5.2% to 7%.

In 2020 and 2021, it was common for new industrial properties with six- to nine-year leases to sell at yields of around 4.75%. As those six-year leases begin to expire, the properties will drop in value unless the tenant renews for at least another six years and the rental has increased by approximately 50% since 2020-2021.

To digress slightly, it is well-known that developers and add-value investors offer incentives to tenants to persuade them to take longer leases, knowing that this will increase the value of the property and enhance its appeal to buyers. When negotiating a new lease today, you could offer a leasing incentive equivalent to 12​months' rent for a six-year lease to persuade the tenant to take a six-year lease instead of a three-year lease. The property's increase in value based on a six-year lease compared to a three-year lease would more than offset the 12 months' rent-free incentive. 

It must be remembered that the yield a property sells at is determined not only by the lease term. Other factors may explain why a property sold at a yield lower than expected.

• ​It may be under-rented with guaranteed rental growth.

• ​It ​may be underdeveloped, i.e., low site coverage, presenting an opportunity to extend the existing building or build a second building.

• ​It ​may have potential for a higher and better use, i.e., converting industrial to retail.

If you are looking to add value to your property, the best call you can make is to me.

In next issue of Koffee with Kevin Dee, I sit down with one of the two brothers who developed a company with 35 branches nationwide, of which they own over 30 of the sites. We discuss why own rather than lease, as well as the benefits and disadvantages of being an owner-occupier.