KEY POINTS:
An escalating scarcity of stock is forcing investors with more than $2 billion to place in South Auckland's booming industrial market, to look off-market for deals to feed voracious appetites.
Investment in the industrial market has, in the past two years, largely been driven by local and offshore funds but there are questions about the future growth of trusts.
The effect on New Zealand's property market of Australia's compulsory superannuation fund contributions has been enormous, says Colliers International industrial manager Nigel Ingham.
More than $A1.5 billion has come into New Zealand's property market in the past four years led by companies like Multiplex, ING and Macquarie Goodman.
Total assets in Australia's property funds have grown at about 20 per cent a year since 2000 and now stand at about $275 billion.
New Zealand's listed property sector has a market capitalisation of $4.5 billion. In comparison, Australia's tenth biggest fund is Stockland, with total assets at about $A7.5 billion.
Ingham says the funds are enormous but they have to work hard and pay handsomely to place money. Fund managers on both sides of the Tasman are at the heart of commercial and industrial price rises, but are still clinging to some solid property fundamentals.
"While New Zealand is not the only investment option for Australian funds, they tend to favour us because we have a familiar legal system, property tenure, the economy is stable and predictable, there are tax advantages and we are still relatively cheap."
However, there is too much money chasing too few buying opportunities, says Ingham, and cash-rich fund managers have to do something with the money they are allocating to property in a situation of high demand and low supply.
"In a typical year there is about $200 million traded in South Auckland A and B grade industrial stock. There is a huge gap between the money to be placed and what is available, making the unlocking of off-market deals essential."
Ingham says it is becoming extremely difficult to find quality industrial investments to satisfy pent-up investor demand. "We are in the tightest market in 15 years. Every day we are out there trying to unhook something to sell."
Colliers International's industrial team has this year been involved in eight off-market deals worth more than $70 million.
Broker Simon Green was recently asked by an offshore fund to approach an owner-occupier with a $50 million offer on its South Auckland distribution centre. The end offer was a yield of about 7 per cent, an attractive incentive for the owner to sell. The owner was surprised by how aggressive the offer was, but decided not to part with the property.
Green says the offer is an indication of investors' creativity and aggressiveness in trying to place money in the industrial market. To be assured of securing properties for their funds, managers are increasingly looking to real estate brokers to unlock assets off-market.
"In many cases its not about the money but the structure of the deal which meets both the buyers and sellers objectives," says Ingham.
In a recent off-market transaction, Ingham and Green worked with two New Zealand trusts for nearly a year on a swap that allowed both parties to leverage off their properties.
The deal involved ING Property Trust swapping three smaller industrial properties at Ellerslie, East Tamaki and Onehunga for an industrial site at Albany Highway on Auckland's North Shore valued at $17.3 million, a yield of 8.05 per cent.
The three smaller properties were valued at $16.651 million and ING Property Trust paid the remainder of the purchase price in cash.
Green says he and Ingham came up with the deal when ING indicated it had several properties it wanted to dispose of but didn't want to sell outright, but rather leverage off them to buy a larger individual property.
The trust's new Albany property is within the Albany Industrial Estate and is a big manufacturing and warehouse complex subleased to HP Packaging until 2013. The property is immediately adjacent to the Home & Leisure Centre, the trust's biggest industrial asset on the North Shore. The deal results in a combined overall land holding of 5.3 hectares and an aggregated property value of more than $30 million.
Of the three smaller properties the trust swapped, two are adjacent to properties the buyer already owns, giving that trust a larger landholding in the same area.
"Because we knew the market, knew our clients objectives and could create a deal to suit both players within their specific criteria, the deal was able to evolve," says Green. "It wasn't about the price; it was about meeting their needs."
ING Property Trust general manager Peter Mence says in a strongly competitive market, the swap transaction is an excellent example of leveraging off the attraction of the trust's smaller properties to achieve its target of owning larger individual assets valued at $10 million or more. Combining this with the future benefits achieved from ownership of an existing adjacent property is an added bonus.
"This deal is an example of tenacity, sitting down with clients to gain a complete understanding of their business and understanding their property strategies," says Green.
But it is a different story when approaching property owners off-market, says Ingham. "More often than not we get knocked back. Land bankers and owner-occupiers, in particular, are hard to budge, picking there are richer gains to now be made developing sites for themselves or holding them.
"But if we can bring a creative deal to the table that benefits both parties then these transactions work. It can take two to three years for a deal to settle to everyone's satisfaction, but knowing where it will fit in a client's property strategy is the key to getting it across the line."
