From Property Talk Community Wiki

Demand For NZ Office Space

June 2007

Continued strong demand for office investment opportunities in New Zealand has underpinned the sales of two Auckland buildings for a combined total of more than NZ$50 million. In the larger of the two deals, the unlisted AMP Property Portfolio’s Shortland Properties arm has paid NZ$38.75 million for Auckland’s landmark Fonterra Centre.

New Zealand’s acquisitive Oyster Property Group has meanwhile snapped up the Hanover Finance Building overlooking Albert Park in a deal valued at NZ$12.88 million. Both sales were negotiated by CB Richard Ellis 1senior director Matt Tooman, who said local and offshore investors were continuing to chase property investment opportunities in Auckland as a result of the strong market fundamentals.

According to CB Richard Ellis’s 1newly issued Auckland MarketView report, the CBD vacancy rate has hit the lowest level since the 1980s after one of the strongest periods of net absorption in a decade.

Some 23,170 square metres of space of additional space was occupied in the six months to December 2006, driving the overall Auckland CBD vacancy rate down by 1.3 per cent to 8.4 per cent. For prime space the vacancy rate almost halved over the same period to a level of just 1.9 per cent.

Mr Tooman said the dwindling supply of space had underpinned strong rental increases, with prime net effective rents having surged by 7.8 per cent in the year to March. The strength of the market had led to a significant tightening in office investment yields, as evidenced by recent sales such as that of the new GE headquarters in Quay Park for NZ$90.5 million. CB Richard Ellis negotiated the sale to a German institution on a yield of just 6.43 per cent.

The Fonterra Centre sale has been struck on a yield of 7.4 per cent. It is the latest acquisition for AMP Property Portfolios, an unlisted fund which last year acquired the listed Capital Properties. The purchase of the 16-level Fonterra Centre at 7-11 Princes Street, was finalised after more than 12 months of negotiations and meetings of both unit and bond holders associated with the vendor, a special partnership managed by MFS PSP Ltd. The 11,500 square metre building is more than 90 per cent occupied by Fonterra Cooperative Group, New Zealand’s largest corporation.

Mr Tooman said the sale had attracted interest from local and offshore investors and developers, interested in both retaining the building as offices and in the potential to convert the property for residential or hotel use if Fonterra decided to exercise a break clause in the lease and relocate.

In a separate deal, the Hanover Finance Building in Kitchener Street has been sold to the Hamilton-based Oyster Property Group for NZ$12.88 million. It is the latest acquisition by Oyster Property Group, a company which specialises in proportionate ownership schemes, which require a minimum subscription of NZ$100,000. Since Oyster was established in 2004 by former Baileys real estate franchisee, Mark Winter, the company has bought a series of properties, including the Caltex House office building in Wellington.

Mr Tooman said the Hanover Finance Building has been purchased on a market yield of 8.12 per cent, taking into account a vendor guarantee over the small amount of vacant space. The 12-level, 2 Kitchener Street office building has a net lettable area of 4274 square metres and is leased to a variety of tenants.

The ownership scheme is already fully subscribed to about 45 investors. It is the first of Oyster’s schemes to be completely funded by equity. Said Mr Winter: ‘’We were able to buy off-market which gave us more time in terms of due diligence and in putting the investor group together.’’

Continued Mr Winter: ‘’One of the difficulties we’ve had is getting stock of this quality given the competition from Australian investors, among others. This building has had a very good leasing history since it was built in the mid eighties and continues to be fully occupied.