KEY POINTS:
Auckland's biggest building renovation has just hooked its first tenant.
The $80 million makeover of a once-tired CBD block has lured Dick Smith Electronics (DSE) to a new store on Queen St.
The retailer has leased the ground-floor retail area in AMP NZ Office Trust's (APT) building at 21 Queen St and will open there soon.
The building has been skinned and re-clad in hi-spec double glazing, giving it the highest Green Star rating.
Rob Lang of the $1.5 billion trust said two retailers were in the running for the premium area on Queen Elizabeth Square.
His business had been negotiating with Tiffany & Co until late last year when the luxury-brand retailer pulled the plug on 40 projects internationally.
Now, DSE has taken an eight-year lease on the building expected to be worth about $113 million when it is finished.
Fletcher Construction will finish the work in September but a Macquarie Research Equities report from Stephen Ridgewell and Stephen Hudson fretted about tenants.
No office space has been leased.
"Currently the office component is 0 per cent leased. Securing new tenants has proved tougher than expected given the macroeconomic background," the analysts said.
"Management has stated that active negotiations are currently under way with a major potential tenant - who we understand is not currently a tenant in APT's portfolio - for 40 per cent of the office space. This is an improvement since the Christmas period when leasing enquiries were low. However, we note APT has so far not been able to convert leasing inquiries for office space at 21 Queen St into new leases," the analysts wrote.
Lang said one business wanted 40 per cent and said negotiations were going on with another tenant.
The analysts said one comfort was that at least DSE would pay the same rent as Tiffany.
But they forecast the building would be only 30 per cent leased when it opened.
"This is probably more conservative than management expectations but more bullish than the forecasts of some market participants. In our view, while leasing activity is slow, the building is in a prime location and there are still seven months to go until the building is completed, giving APT time to find tenants.
"In a worst-case scenario where only 10 per cent of 21 Queen St is leased and holding everything else constant, we estimate net earnings per unit in 2010 will fall to 7.8c per unit, 2 per cent below our formal 8c per unit forecast."
Lang said the leasing market was tough and slow.
But this was expected and the trust had set aside funds to even out distribution payments to unitholders.
The analysts said the trust could "dip into" its $4 million distribution reserve and pay out more than 100 per cent of its earnings if it needed to.
Lang said this put the trust in an extremely unusual position because no other listed property trust had created such a reserve.
"Real estate can be lumpy as leases expire and vacant space can arise."
21 QUEEN ST
* 4,700sq m of net lettable area.
* Anchor retail tenant just secured.
* To be finished in September.
* Four new floors added on top.
