Market forces commercial building shake up

Property players developing their own sites as buoyant sector makes it harder to buy assets, says expert.

Listed property businesses are selling older assets but a buoyant market is making it harder to find newly built replacements, forcing them to develop their own buildings, says a leading industry player.

Shane Solly, Harbour Asset Management director, portfolio manager and research analyst who helps manage $1.4 billion of equity assets including listed real estate stocks, said property businesses faced challenging times buying buildings in a fast-rising market.

"A number have increased resources to undertake developments," he said, citing Kiwi Income Property Trust's completion of the new ASB North Wharf, Precinct Properties' Wynyard Quarter and Downtown Shopping Centre plans and DNZ's new $160 million Westgate mall now under development.

The traditionally conservative businesses have preferred to buy finished buildings. But they are now being forced to build in order to get good assets like A-grade office blocks because these are in such short supply in New Zealand, Solly said.

"The cycle has moved from three years ago where they could buy assets. Now it's clearly more difficult to buy so the prospects of developing become better. But it's a different risk profile," he said.

"Asset values are going up, tenants are growing and that's giving people confidence to do development."

Investors sometimes questioned the risks involved in development and preferred the mainly investment-based businesses to take on less risk.

But Solly said the businesses had no choice.

Kiwi had sold its twin-tower 205 Queen St for $103.8 million, blocks Solly said had always been difficult to lease because Auckland's commercial hub had shifted more towards the waterfront and the west.

Goodman Group's Highbrook business park and Auckland International Airport's substantial landbank were potential threats to other listed developers seeking to build in non-CBD Auckland locations, he said.

Solly praised Kiwi's $28.2 million one-off development gain on ASB North Wharf. He said this was a spectacular success - the building cost $134 million to build but was now valued at $162.2 million.

Precinct this year said it wanted to sell its SAP Tower at 151 Queen St. Solly said it needed money spent to bring it back to A-grade status so some investors might view it as a potential apartment conversion.

Precinct chief executive Scott Pritchard last month said that no deal had been done.

"The SAP sale programme is continuing. We had really good interest in the asset and are working with a number of parties at present," Pritchard said.

Solly noted international investor Dexus Property Group had put up for sale its Lumley Centre at 88 Shortland St. Speculation is that it could fetch around $150 million. One of the Telecom four-building campus-style Victoria St West blocks has been sold.

The rising market meant big listed real estate investors had more resources to pour into development. One-off development gains were welcome but not the main focus for institutions.

"We look for dividends to be based on recurring incomes," he said, citing rental returns.

Big change

Precinct Properties
*Planning a $200 million five-building Wynyard Quarter campus
*Planning $300 million 32-level Downtown tower
*Selling: 29-level SAP Tower, 151 Queen St

Kiwi Income Property Trust:
*Finished building $162.2m ASB North Wharf
*Sold: twin towers at 205 Queen St for $103.8m
*Planning: LynnMall upgrade, Auckland

DNZ
*Building $160m 3.4ha Westgate Mall
*Planning Johnsonville Mall upgrade