Investors snap up bargains

Bruce Whillans (left) and Ross Healy in front of the historic Imperial Buildings on Queen St, recently purchased by Phillimore Properties. Photo / Supplied

Commercial property investment in Auckland and New Zealand is again the realm of private investors who are snapping up millions of dollars of assets in the wake of the recession, says Bruce Whillans, institutional investment properties national director for CB Richard Ellis.

"Private investors are back in the driving seat after a two- to three-year absence from the market when they were unwilling, or unable, to compete with listed trusts and institutions which forced yields down," Whillans says.

Now the tables have turned and CBRE has sold more than $170 million of mainly institution-owned commercial property in the past year to private investors.

"Our clients recognise the market is bottoming out and they are taking advantage of low interest rates and the re-pricing of many prime assets," Whillans says.

The company's sales have included six CBD properties in Auckland and Wellington. Among them are a CBD tower in Wellington that sold for $62 million, Forsyth Barr House on Shortland St which went for $41.5 million, the Kitchener St carpark that sold for $19 million, a large commercial building on Albert St for about $20 million and the Crown Institute Building on Lorne St for $10.85 million.

Whillans, one of Auckland's most experienced commercial real estate brokers, has sold more than $1 billion of property over the past 25 years and says he has seen every property cycle come and go.

"This cycle has been typical of others - 'boom and bust'. Again there is a rebalancing of the investment market after a heady few years of international asset-grabbing by mainly Australian institutions spurred on by the availability of superannuation money.

"Foreign buyers ploughed a record $1.1 billion into the market in the first seven months of 2007. New Zealand's investment returns were exceeding those in Australia and this was underpinning continued interest in the local markets, but this started disappearing early last year when listed trusts began reporting heavy unrealised portfolio revaluation losses of about 10 per cent to 12 per cent."

CBRE's latest research shows the speed of the turnaround in market fortunes has been swift. After five years of CBD yields firming, prime capital value was unwound in just 18 months. Whillans predicts that institutional investment levels will remain lacklustre for the next 12 to 18 months as the market settles.

He says the listed trusts and institutions are now net sellers and this has allowed private investors and companies to get their hands on some good assets at realistic yields.

"Sales volumes are still quite high, but prices for individual properties are lower. Investors are cautious, reducing risk by only considering properties with good fundamentals. And the increased investment activity shows there is both equity and credit available for the right type of property."

Whillans says CBRE has been successful during global and local upheaval because it has matched a strong private investment client base with institutional sellers. "Having a network of international offices and the back-up of a full services property company has been pivotal in doing deals in this recessionary market. It is not a market for big-budget campaigns or the faint-hearted. It is about a focused approach and matching buyers with sellers to get results."

One buyer who has found the market turning to its advantage is Phillimore Properties, a small company that has a passion for heritage buildings. Owned by Ross and Ken Healy, the firm recently bought the partially tenanted and refurbished Imperial Buildings on Queen St.

Phillimore Properties is based on the second floor of the elegant heritage General Buildings in Shortland St. The property is described by the Historic Places Trust as "one of the best preserved Chicago-style buildings in Auckland".

The Healy brothers and co-investor Terry Gould might pull up roots in the next few months and move their office round the corner into the Imperial Buildings - two adjoining properties dating back to the beginning of last century and known then as The Imperial and Everybody's Buildings.

Both properties, designed in the Edwardian free classical style, have had a colourful history, individually operating as The Queens Picture Theatre, one of Auckland's first cinemas, and The Everybody's Picture Theatre, then later The Roxy. The buildings were also used as tearooms, offices, a paint manufacturing and glass retail outlet, apartments and flagship Woolworths and Deka stores.

The space behind the distinctive heritage facades of both properties was refurbished by the previous owner and cost several million dollars. This included strengthening work, gutting the interiors, knocking out abutting walls to open up 3370sq m of office space over four floors, re-roofing, rewiring, re-plumbing and bringing both up to fire safety standards.

The ground floor retail of the properties, now known collectively as The Imperial Buildings, is leased to luxury retailers Gucci and Louis Vuitton along with jeweller Michael Hill.

Ross Healy says from a commercial aspect the buildings comprising a total of 6263sq m have good cash flow from the tenants and it gives Phillimore Properties time to come up with a comprehensive plan for the rest of the space.

He says the company is considering a mixed-use environment that could include apartments on top floors, office space underneath and cafes, bars, more retail and an internal courtyard from the Fort Lane side of the buildings.

"The long-term dream would be to recreate a mini Vulcan Lane. Fort Lane already has several bars and the Angus Steak House. Opening up the rear of the Imperial Buildings would generate more street-level activity and with the Auckland City Council's help we could pedestrianise this area."

Healy says the first stage of the project will be to lease as much as possible of the existing refurbished office space facing Queen St. "That will mean partitioning off areas, creating lobbies and improving the air-conditioning.

"Redevelopment of the Fort Lane part of the buildings will need more careful thought and consultation with the council's heritage division. We also want to investigate carparking as a possibility for the basement area."

A year ago, Healy says Phillimore Properties would not have been able to get the building. "The recession has been helpful for companies, such as ours. While institutional buyers built up commercial property books during the good times, we took the opportunity to sell some properties and wait the market out."

He says, interestingly, there is not as much quality redevelopment property on the market as many people believe. "We have been waiting for properties with income where we can add some extra value."

Healy says the key to being a successful buyer in this market is having sufficient equity and credibility with vendors and banks. "The ability to borrow funds is at an all-time low and it is important to have a good clean credit record with banks. It is of enormous benefit in a market that will have plenty of more opportunities to come for astute, wealthy individuals, family trusts and private companies."