Tramco has 'licence to print money'

By ANNE GIBSON

A formula for making money from investment property, described as little short of brilliant, has been revealed with the sale of the ground lease on a prominent block of Newmarket shops for $900,000.

The shops at 19-21 Remuera Rd are on the corner opposite the former Mercury Energy building, where shopping mall owner Westfield NZ has set up its head offices.

Tram Lease, a company associated with Tramco Group Property Investors, owns the 486 sq m block of land, but has sold the lessee interest in it to an investor, who in turn has rented the shops to tenants.

It is that lessee interest in the Newmarket block of shops which changed hands on August 18, while the land owner remains Tram.

One of the directors of Tramco is millionaire property investor Mark Wyborn, also a director of Viaduct Harbour Holdings which paid $75 million for 18ha of land around the Viaduct Basin three years ago.

Tramco offered the Crown $250 million recently for land at the Navy's Devonport base, which it wanted to develop for residential use, but the Crown rejected the offer.

Tenants in the Newmarket shops are Umbria Cafe, Smith's Sports Shoes, Africa Travel and Travel Health.

The land on two titles is subject to a 21-year rent review, due this November and October next year.

The investor has bought the lease knowing about the escalation in the ground rent, says agent Bill Ludbrook of Barfoot & Thompson Commercial.

He estimated that the new value of such blocks could be $5000/sq m but on Broadway it could be as high as $8000/sq m.

Given this, the block would be worth $2.2 million.

Assuming this was the case, ground rent - based on 7.5 per cent of the total value of the land - would be $165,000 a year for the block.

"It's a licence to print money," Mr Ludbrook said of Tramco's substantial investment in Newmarket, which it bought from the Railways Corporation in the early 1990s, soon after the Government sold the business to Tranz Rail Holdings.

Advantages for Tramco owning the title to the land such as this 486 sq m block and leasing it out include:

A continual stream of rental annually from selling the leasehold interest to an investor.

No outgoings or maintenance on properties, which are the responsibility of the owner or tenants.

No need to find tenants for the property, which is the responsibility of the lessee.

The most important advantage is that when the ground lease comes up for review, revaluations are expected to be substantial and this in turn would yield a major ground rent increase.

"It's exactly the same formula on the Viaduct land," Mr Ludbrook said, remarking that the formula was little short of brilliant.

What makes the Newmarket block even more important is its proximity to a 65,000 sq m mall that Westfield plans to build nearby.