The planned $160 million ASB headquarters should be a good deal for its developer and landlord but there are some concerns, an analyst says.
Jason Lindsay, research analyst at Credit Suisse, said the $1.8 billion Kiwi Income Property Trust stood to gain big rewards from the deal to which it will contribute $121 million.
The development appeared to be good for the trust, he said, citing the blue-chip tenant on an 18-year lease which would add more than a year to the portfolio weighted average lease term.
An impressive headline yield with no incentives for the office tenant and annual rental increases of 2.5 per cent, including a mid-term market rent review, all boded well for Kiwi, he said.
But he also has reservations, particularly over Kiwi building on leasehold land.
He was also concerned about the leasing up of the retail component of the planned building on Wynyard Quarter at Auckland's waterfront and the specialised nature and location of the building.
The project could also have a negative impact on Auckland's CBD office market where Kiwi has a quarter of its portfolio, he said.
If Kiwi had not raised $120 million from its mandatory convertible notes issue, if the market changed and it did not proceed with the ASB development, its earnings and valuation might be 3 per cent higher in the longer term, he estimated.
Craig Tyson, investment manager of ING (NZ), has several concerns about the tower.
Although the deal had some merit for improving Kiwi's portfolio metrics, it also had drawbacks.
He praised the lease term of at least 18 years to a blue chip tenant and fixed annual rent reviews of 2.5 per cent.
But he has doubts about the value of Kiwi developing the new tower on land it does not own, saying the real issue with leasehold land is it is eventually worthless, whereas freehold land retains its real value over the long term, which is why he said investors preferred freehold titles.
Lindsay said the tower would be the first significant office building in the Wynyard Quarter precinct.
"This is pioneering stuff. If the area does not develop as planned and ASB decide to relocate back to the core CBD in 18 years' time, Kiwi may find it difficult to re-lease the building.
"We need to discuss with management rights of renewal, who owns the fit-out - perhaps Kiwi do, which may explain the higher yield due to specialist fit-out - as this would likely have a bearing on the long-term plans of ASB," Lindsay said.
He cited the impact on remaining CBD office property and the prospect of Kiwi "cannibalising its own market" as problems.
The proposed ANZ development for Customs St East and the ASB tower were highly likely to proceed, he predicted.
This would have a negative impact on rents and vacancy in the Auckland office market for years to come.
CB Richard Ellis forecasts included optimistic and pessimistic outlooks.
"CBRE believe it is likely that both ANZ and ASB will relocate and this is incorporated in the base (medium supply) and pessimistic (high supply) scenarios.
"In the optimistic (low supply) scenario, only one bank moves into a single tenant development."
Chris Gudgeon, chief executive of Kiwi's manager, says the ASB development is conditional on a number of issues but he hopes to start construction on the corner of Jellicoe and Halsey Sts next year.
The building should be finished by 2013 and ASB says it will then shift 1100 people out of Albert St.
Controversy over the project's design has been rejected by ASB, which says the volcanic shape on the building's top is only in a conceptual drawing and designs have not been completed.
ASB DEAL
* New waterfront HQ
* Bank has 18-year lease
* 18,000sq m offices planned
* 1700sq m of retail space
Questions hover over $160m ASB block
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