KEY POINTS:
An innovative new property investment product that has just been launched on the market is offering investors the opportunity to share in the ownership of the freehold ground lease interest in a large CBD site.
Augusta Funds Management is acquiring the 2.185ha Beaumont Quarter site in Beaumont Street opposite Victoria Park from Melview Developments Ltd for $70 million. Melview has developed and sold 258 homes and apartments on the site, with the building owners collectively paying 7 per cent of the freehold value of the land annually in ground rent, reviewed every seven years.
Augusta is offering investors shares in Beaumont Property Ltd (BPL), which will own the land in perpetuity, in what managing director Mark Francis describes as a low-risk capital growth play. Augusta will manage the property on behalf of investors.
Bayleys Real Estate has been appointed to sell the shares through senior broker Bruce Whillans, who also brokered the sale of the site to Augusta.
A total of $29 million worth of shares, at a minimum subscription of $500,000, are being offered, with the balance of the purchase to be funded by an ASB Bank loan, fixed for seven years. Francis says the acquisition has been geared to the optimum level, at just over 61 per cent of the purchase price, to maximise the return on equity to investors, which is forecast at 10-13 per cent per annum, without incurring a tax liability.
Basically it is being leveraged up to break-even point so the revenue from the ground leases will equal the deductible expenses encompassing the interest payments and management costs, so there is no taxable income being generated.
Investors will receive a capital return following the March 2015 rent review when the loan will be refinanced, based on the increase in rent and the higher valuation of the land.
Projected returns at this point on a $500,000 investment range from $356,722, based on a growth rate of 5 per cent in land value, to $511,921 based on a 7 per cent increase in land value.
Francis says these are realistic and achievable forecasts given an average annual growth rate of 6 per cent in Auckland CBD fringe land values over the past 12 years.
The property is also near the gateway to the western reclamation precinct which is set to undergo a major redevelopment and rejuvenation which will have a positive flow-on effect on land values in the area.
The Beaumont Quarter site is subject to 10 perpetual ground leases which commenced in 2001.
The next rent review is due in March 2008 when, based on current land value, the total ground rent is expected to increase to in excess of $4 million per annum.
As part of the sale and purchase agreement, Melview is topping up the ground rental at $4 million per annum until the review.
Francis says given the uncertainty in global investment markets there is a flight to safety occurring around the world and the Beaumont offer has been launched with this in mind.
He says ground leases have long been recognised as the safest form of property investment but up until now have been beyond the reach of most investors.
They have largely been the domain of royalty (particularly in the UK), churches, the super-wealthy or large organisations.
This is the first time that access to this type of investment has been available at this sort of entry level.
Whillans says it is one of the most innovative property investment products to be launched on the property market during his 23-year involvement in the industry and is attracting strong interest.
He says the shares are being marketed to Bayleys' investor database and other seasoned, experienced investors looking for a bottom-drawer, long-term capital growth investment.
He says a number of parties are looking to take more than the minimum $500,000 shareholding. Further shares can be purchased in increments of $100,000.
It's not an investment for people with a short-term horizon, or the need for annual income, but would be an ideal component of a long-term superannuation plan.
Whillans says ground lease owners are not exposed to vacancy risk that occurs with the ownership of buildings and the ground lease provides perpetual income, which in the case of the Beaumont site is spread across 258 building owners.
The ground rental income is effectively secured by the significant buildings that are on the land and the bank mortgages that generally sit behind them.
Whillans says land appreciates in value whereas buildings depreciate and ground lease owners do not have the capital expenditure outlay of building owners.
He says the site is a prime inner-city residential location, given its proximity to Victoria Park, the downtown waterfront area and the CBD.
Auckland City Council has praised the award-winning Beaumont Quarter development, citing its house orientation, views, natural sun, building density and site feature preservation.
Francis says it is Augusta's intention to establish a secondary market for the sale of shares in BPL as it has done with the proportionate property title schemes that it runs.
Augusta Funds Management was established in 2001 and manages approximately $160 million of commercial and industrial property assets including the NZX-listed Kermadec Property Fund and various unlisted property syndicates.
