KEY POINTS:
New Zealand's $6 billion listed property sector has been booming.
The trusts have enjoyed record revaluations as the value of their land and buildings rockets up. Their unit prices have risen in the past 12 months, sometimes by a third. Investors are being paid high distributions and many of the trusts with March balance dates have just posted record returns.
Life in the world of listed property trusts hardly gets any better than this.
But with a shortage of development land, there are questions about how the trusts will keep growing.
The trusts are finding it increasingly difficult to buy development properties outright - one of the keys to their growth. So they are compromising and many trust bosses see this as the shape of things to come.
Some of the richest NZX-listed trusts with assets of about $1 billion are carving out new territory by forming partnerships with other businesses to develop or buy properties.
The trusts are getting their hands on land by entering into arrangements with companies, private property owners, tenants, financiers or managers to buy real estate so they can develop and drive growth.
Andy Evans, management boss of the $1 billion ING Property Trust, predicted the listed sector would increasingly enter partnerships.
He cited ING's 50 per cent joint venture asset, the Manawatu Business Park in Palmerston North, as a prime example of these new type of deals emerging.
Last July, ING bought half the capital of private company North East Industrial, owner of a prime 70ha commercial/industrial zoned block. Four months ago, the trust signed new tenants to long-term leases at the park, generating a cash stream of $400,000 annual rent.
The trust could not buy the Palmerston North block of land outright but saw big potential there, so struck the deal with North East to develop in partnership, halving the potential profit but giving the trust a potential pipeline of growth and opportunity.
Another ING joint venture is more controversial. Last month, NZX waived the need for the trust's management company to get unitholder approval to spend $24 million on a leasehold development site at Albany. The manager is entering a joint venture over three to five years with the freehold owners who include Symphony Group, which owns 50 per cent of the ING trust management company.
John Dakin, chief executive of Macquarie Goodman NZ, said a key to his trust's growth and expansion was its relationship with tenants, but he too stressed problems created by rising property prices.
"Our key to competing in this market is through our development business. Going down a development path has been a deliberate strategy in the face of a high level of competition for assets," he said.
"Most of our growth now comes from development. We are still active in the market but prefer opportunities that have a value-add or development angle to them." The trust's 50 per cent purchase last week of the company that owns Show Place Office Park in Addington, Christchurch, for $30 million was one example, Dakin said. The trust bought half Henshaw Holdings, the park's owner, from interests associated with Christchurch investor Ernest Henshaw.
A strong tenant-landlord relationship was another avenue for growth, Dakin said.
"The other key component of the development strategy as well as owning land is access to customers. Having a strong customer base is critical to getting pre-commitments and thereby delivering new assets with quality customers," Dakin said. "It is difficult to compete at retail prices so we are creating our own product."
Angus McNaughton, who heads the management running the $1.9 billion Kiwi Income Property Trust, said joint venture deals would also give his trust more scope to expand in future.
"We have significant skills in both the retail and office markets and there are opportunities to leverage off these skills through joint ventures," he said.
But Kiwi had other opportunities, particularly its holding of undeveloped land surrounding the $300 million-plus Sylvia Park at Mt Wellington.
"Kiwi has significant internal growth opportunities including office buildings at Sylvia Park and the further development and growth of all of the trust's retail assets, for example a potential $90 million extension of The Plaza in Palmerston North." Rising property prices were a major challenge for the trust on the development scene, he said. "Despite a competitive market there are still transactions where we can add value," McNaughton said.
Deals by the $1 billion Macquarie Goodman Property Trust provide the most striking example of partnerships. For some years, it has bought the bulk of its properties from ASX-listed associate Macquarie Goodman Group. The group buys the land and develops, selling buildings to the trust, an arrangement regarded in the sector as the group buying wholesale and the trust paying the full retail value.
Simon Botherway of Brook Asset Management has noticed a shift in the way the listed property trusts are doing business. And he has doubts about the tactics. "Trusts are increasingly assuming development risk or diluting portfolio quality in order to grow," he said. Getting a land bank for development like Macquarie was obviously a clear competitive advantage, he said.
But Botherway is predicting a cash bonus for the trusts come October 1 when the new portfolio investment entity regime kicks in. "The trusts should be in a strong position to successfully acquire," Botherway predicted.
Mark Lister of ABN Amro Craigs said prices were crippling some trust's growth: "We've heard many of the trust managers begin to talk about this challenge recently," he said. "I believe that this challenge isn't going away in a hurry." Offshore funds which have a lower cost of capital can settle for a lower return on their investments, so can pay more.
"As a result, listed property trusts will have to look internally for growth. So those with either landbanks such as Macquarie or with other development opportunities within their portfolios will be advantaged.
"Kiwi has retail development opportunities in Palmerston North once they have finished Sylvia Park. Property For Industry has a pipeline of smaller expansions to many of their properties to keep them going.
"AMP NZ Office Trust has the development site they recently purchased in Auckland as their next project.
"ING has the interest in the Palmerston North industrial park that they will be working on."
Rob Lang, head of AMP NZ Office Trust's manager, said he could still buy well to grow. He cited the trust's $39.5 million purchase of Wellington's AXA House, a property now valued at $42.3 million. "And we were bidding against many competitors, including offshore investors."
Future growth would also come from purchases like 21 Queen St which the trust is refurbishing and re-tenanting.
"We will pursue opportunities before they are even on the market," he said, citing the strength of his trust's management expertise and inside knowledge.
"We see our property expertise in management as a competitive advantage, whether the market is buoyant or tight."
