I made a presentation to Brightstar’s commercial leasing & property management seminar in Auckland on 15 July, concentrating on markets and values, sticking mostly with Auckland and looking at some specific listed property entities’ assets.
The markets I was talking about were the markets changed by planning schemes, and the values a consequence of those planning changes.
An important feature of the picture, and of subsequent discussion, was the introduction of precincts & quarters to Auckland’s central business district. This is the text of the presentation:
I want to look at two parts of the framework for investment. One concerns regulation, but not particularly the Resource Management Act, and the other is to look at investing in property though securities.
What I’m going to say about Auckland can be applied, to some extent, pretty well everywhere. Auckland, by its population, extent of the metropolitan area and recent growth rate, leads in many ways but isn’t necessarily different beyond that timing factor.
The first thing I want to discuss is the way our politicians have become more organised. When it doesn’t suit you, that your local council is slowing down your development plans by the way it’s tediously implementing every sub-clause of the RMA, you complain.
When the council finally gets its plans into place, you’ll complain even more. Because when that happens, the council will be able to say, very quickly, that it doesn’t like what you’re proposing, and why. The flexibility will be reduced.
For several years councils have been putting in place a planning fabric, running down from national policies & strategies, through regional ones to the local level.
In the last 5 or so years it’s been hard to get sense out of many councils on particular development plans because a concept plan hasn’t been prepared yet, or a catchment plan or structure plan has to be completed.
(See Camperdown case a test of planning rules and planning sense, published on The Bob Dey Property Report, 11 June 2001).
Those plans are now being put in place â€“ in cities and districts, in regions, over the whole country.
Most of this planning fabric, of catchment, concept & structure plans forming distinct parts of district plans, concerns development on the edge. But within urban areas there are also changes. Take, for example, the heritage & character overlays introduced by Auckland City Council last year for some of its suburban business areas.
CBD quarters & precincts
Auckland City, again, has had its planners beavering away on plans for business quarters around the CBD, which in time may become very useful marketing tools but at the moment look more like what rock to use for the footpath, where to place the rubbish bins.
Around Aotea Square and the Aotea Centre, the council has proposed an Aotea Quarter, with distinct precincts for business, large-scale entertainment, and a lower-scale arts precinct.
The old buildings above the new Britomart rail station will be transformed into a lively precinct of boutique shops, offices, entertainment, apartments, and a hotel.
The western side of the CBD, beyond Nelson St and down to Victoria Park, is to become a more intensive live/work Nelson Quarter.
Nodes & hubs
Around the Auckland region, councils are planning nodes and hubs where development can be more intensive. In many cases the area immediately adjacent to the station is the worst part of the neighbourhood. This kind of planning makes the area around a railway station immediately more valuable.
The number of dwellings in these new-look zones will be increased, either with apartment blocks or, in some cases, medium-density townhouses. They may be above shops or offices, and there may be parking garages so commuters can park all day at your node and catch the bus or train into the CBD.
Something like that. It’s a long process. But it adds two more conditions to your estimate of what will happen to the CBD. One is that these nodes will become life-centres in themselves, drawing business activity that would otherwise have been carried out elsewhere, perhaps in the CBD. The other is that by being part of the enhancement of the transport network, they will draw people out of private transport and into buses or trains.
There is, of course, a third condition to the estimate of what will happen to the CBD as a result of these changes. That is: How long will these changes take? If it takes forever, it can be disregarded. If there’s a half-pie change, both the CBD and the suburb could be screwed up.
Some of these changes are under way â€“ Glen Innes has a new station and Panmure’s will be shifted so it can become a more significant interchange. These two places are important features on the region’s suburban growth plans, on the programme to create an eastern transport corridor, and on the weight you give to suburban business development in its impact on the CBD.
Around the whole region there are many other examples of decentralised development being planned â€“ and in many areas developers are agitating for the process to be sped up.
What this boils down to is a formula for change. Although the RMA was supposed to be a move away from the prescriptive nature of the old Town & Country Planning Act, all these new layers of planning â€“ and particularly the desire of councils to make nicer neighbourhoods â€“ do set down a prescription, or at least a framework, so it will be harder to develop outside the square.
Putting more focus on suburban business areas doesn’t mean they’ll replace activity in the CBD, though. Big CBD firms aren’t going to leave an office tower on Shortland St to set up in Mt Albert.
New Zealand regions have also never got into creating satellite business districts near their main central business districts. Manukau Central has a few office blocks but isn’t a thriving business focal point.
So, unless that attitude on satellites changes, the country’s CBDs look secure.
Geographic basis of investment
Following on from that, do you base investment on where people work now, or where they might in 5-10 years? What’s your investment timeframe?
As you can see, the geographical question is hardly straightforward.
In Auckland, for example, do you regard the CBD as the sensible investment target? Or Auckland City’s suburbs? Or further afield?
Within the CBD, that might mean comparing opportunities on Queen St or Albert St, or looking at Viaduct Harbour or Quay Park as fringe or core. In the suburbs you might compare Mt Wellington, Green Lane, Glen Innes and Otahuhu.
Otahuhu? The pits, surely. Sure, it’s at the centre of the isthmus, but it’s a rundown suburb with a rundown town centre.
Consider its future once there’s a motorway interchange giving access to the new Highbrook business park, and leading directly from there through to the East Tamaki industrial zone. And in the Mangere direction, consider Otahuhu’s future once Macquarie Goodman gets the old Otahuhu railway yards turning into an industry park.
Let’s take a closer look at Auckland’s CBD
For a start, where is it?
This would normally sound like an entirely stupid question, but in Auckland’s case it happens to be an entirely reasonable, and intriguing, one.
The agencies’ maps traditionally mark out the central business district as covering the area from the downtown waterfront to Karangahape Rd, bounded in the east by Symonds St and in the west by the motorway.
The core is usually taken to stop at Mayoral Drive â€“ just past the town hall â€“ and stopping in the west at Kitchener St and in the east at Nelson St.
The real core has shrunk, by one block, since the 80s. Essentially it runs up Queen St to Victoria St â€“ beyond that is education & entertainment territory. It used to peter out after Wellesley St, a block further uphill.
On the eastern side, it takes in High & Lorne Sts, O’Connell St, and runs up Shortland St. On the flat, going a few steps along Fort St or Customs St takes you out of the core.
On the west, anything uphill beyond Albert St is fringe, but at Customs St the line does a loop to include the Copthorne Hotel and PricewaterhouseCoopers Tower.
That definition leaves out the Metropolis and Chancery in the east, the ASB Centre, SkyCity and Heritage in the west.
Definitions are fluid
But definitions of business areas are apt to be fluid things.
Development of the Viaduct Basin, then steadily the rest of Viaduct Harbour, has put some major business tenants in the fringe. The Viaduct precinct has a major divider, Fanshawe St, separating it from the CBD core. So, is it CBD?
Between Fanshawe St and Queen St, IBM and the Heritage Hotels are within the wider CBD definition and, as the flow of people between Queen St and the Viaduct grows, they’ll probably become part of the core.
Britomart has been a stagnant piece of the CBD for more than a decade. Its development will create business flows eastward, not so far as to make Quay Park part of the CBD but certainly making Chancery and the Metropolis more attractive.
The developers’ intention is to make Britomart a centre for high fashion, boutique offices, the arts, creating a blend of users who will cross categories. There will be first-floor retail, and a building where apartments, shops and offices are wrapped around a parking core.
A small piece of history
In 1988 there were investors with low-grade buildings who couldn’t give their buildings away, couldn’t find tenants, had no development prospect if they demolished. You didn’t talk yield, because there was none.
Through the 90s the CBD gradually regained its strength and now there’s a demand for parking spaces which had previously been provided on vacant building lots.
Apartment conversions reduced the vacancy rate in low-grade office buildings, and then the education sector came to the rescue.
According to Bayleys’ CBD report for the first half of 2004, the education sector absorbed 30,000mÂ² of office space in the year to June 2002 and another 7500mÂ² in 2003, but in the past year has handed back 5200mÂ².
According to Auckland City Council, 65,000 people work in the CBD. In the 10 years to 2001, its residential population went from 1400 to 9000.
I quite like another piece of information from Bayleys a few months ago, where they produced a map chopping the CBD into 9 precincts, and putting vacancy rates on 8 of them. The one to miss out was Quay Park, which doesn’t really have the stock to come into consideration.
Bayleys takes the core area right up to Princes St so it includes the old KPMG building, now occupied by Fonterra. That core had 10.9% vacancy early this year.
Fringe precincts doing well
Three of the fringe precincts did better. Up Anzac Ave and Symonds St, almost the entire commercial building stock is secondary but vacancy is down around 7-8%, supported by the education sector.
The Viaduct is the other precinct doing particularly well. According to Bayleys, completion of the KPMG building there took total Viaduct office space to 41,000mÂ². Newcrest Holdings has nearly 25,000mÂ² more under construction, 14,000mÂ² in the Vodafone building and another 10,500mÂ² to come in a third building next to Maritime Square, tenancy not yet confirmed.
That makes a total 65,000mÂ² before Trans Tasman gets started on its development site nearer the Westhaven marina.
So, in the space of about 4 years, the CBD has lost the equivalent of 2 towers to an area which is still theoretically fringe.
The next trick in the Viaduct is the start of negotiations on ground leases. There have been some preliminary skirmishes, but the real action will get going in December.
Back to the framework
Now, to get back to the framework of investment. What the city council has done in creating precincts and quarters is to give parts of town an identity which they’ve never really had. The Bayleys precincts are slightly different but, you watch, with a bit of modification you’ll see some very identifiable districts being marketed.
That, in turn, will change investment returns.
Consider this: If you advertise a property on Nelson St or Sale St, nobody knows where it is. If, in two years, you advertise a site in the Nelson quarter that’s available for medium-density live & work occupation, people will identify the quarter, identify the council’s preferred redevelopment style and therefore the kind of project that’s likely to get quickest consent in that precinct.
That’s a new direction for commercial property, gives a whole district a different investment return potential, changes all the numbers.
And consider this: As I’ve said, I’ve always regarded the ASB Centre as being on the fringe of the CBD. But what if it becomes the central office block in an entertainment quarter that has convention centres on either side of it. Does it gain new life as the centrepiece of a vibrant quarter, or remain forever off the pace?
Now I’d like to look at the role of the interlopers from Australia.
A new surge of Australian interest in New Zealand has followed the growth of compulsory superannuation across the Tasman and some corporate changes, also across the Tasman.
A feature of Australians’ interest is the lack of permanence about seemingly permanent structures.
Take Lend Lease, for example. As part of its global dream, it had 50% of the management of Kiwi Income Property Trust and it was to be a valued cornerstone investor in Kiwi’s Sylvia Park town centre development in Mt Wellington.
Instead, Lend Lease discovered last year its globalisation plan was a bad dream and it got out of Kiwi. Its place was taken by Colonial First State, also from Australia.
Colonial, by this stage, was owned by the Commonwealth Bank, which has been a solid supporter of Kiwi but decided to get out of the Colonial First State Property Trust, selling to Macquarie Goodman, of Australia (with some New Zealand parentage).
Meanwhile another Commonwealth subsidiary, ASB Bank, and the joint owner of its headquarters in Auckland, the AMP Property Portfolio, sold the ASB Centre to Multiplex, of Australia. The Multiplex deal followed a decision by the AMP NZ Office Trust in June 2003 not to buy, at the same price.
Multiplex bought the ASB Centre last October for $112.6 million on an 8.5% cap rate, 10.25% discount rate, 10.27% internal rate of return, and with the 33,443mÂ² NLA valued at $3366/mÂ².
The AMP trust had its eye on the building when it was listing in 1997. At that time the ASB Centre was valued at about $160 million. In Multiplex’s hands it’s still rated as a premium building.
What makes more value â€“ location or building quality?
I’ve always maintained that location has a fair bit to do with whether a building is premium or not â€“ you can’t just rely on the fantastic features of the building. That would help explain why a building which the AMP office trust does own, the ANZ Centre â€“ closer to the water on Albert St â€“ has had a market yield of 8% put on it, though it was only 87.4% leased at 30 June and it was still regarded as 1% over-rented.
Would making the ASB Centre a prominent point in a new precinct help the building’s value? Equally, if the area between Albert and Fanshawe Sts becomes an identifiable precinct â€“ Bayleys’ “western peripheral” might not do the job â€“ will that make the ANZ Centre, and the IBM Centre just above Fanshawe St, more attractive because they’re in a place with an identity?
While we’re rating the main buildings around town, AMP’s PricewaterhouseCoopers Tower has been given a market yield of 7.6%, IAG House (the old Fay Richwhite building) and Quay Tower both 8.8% market yields.
Kiwi’s Vero Centre gained $10 million in a 31 March revaluation, putting it at $215 million and an 8.4% yield.
All these properties involve Australians, one way or another.
IBM Centre, Symphony, Colonial, Macquarie
The IBM Centre was an original sold by Symphony into the Colonial First Estate float in 1999, now owned by Macquarie Goodman as buyer of the Colonial trust.
Just as you can’t make any sweeping generalisations about the influence of the Australian listed sector buying into New Zealand, you can also not make sweeping generalisations about the direction of a portfolio over the 5 years since the Colonial float.
Several of the buildings in that float have fallen in value â€“ the Wellington headquarters was an embarrassingly bad example, getting 10 points for a superb pike off the high board â€“ and a couple of them have gained in value. Mostly the cap rates are firmer.
So IBM was on a 9.6% cap rate in 1999, and the 2 Carlton Gore Rd properties sold into the float were on 9% and 9.4%. They’re all now on 9.25%.
The Kodak and Ricoh buildings on Stanley St have firmed to 10% and 10.5% from 11%.
Macquarie Goodman has the paint brush out at all these sites.
It’s also making waves outside the CBD:
It’s bought the Fletcher Challenge complex at Penrose from Trans Tasman for $72 million, on a 9% yield â€“ the same yield it was at in 1994 in the Seabil float. At that time it was valued at $65.35 million.
It’s bought Central Park from the Jhunjhnuwala brothers of Singapore for $52 million, with the intention of turning Central Park into a $100 million investment in the space of about 5 years. The Singaporeans’ Hind Hotels bought Central Park from the statutory managers in 1992 for $38 million, talked about developing, let Manson come in next door with superior new premises and saw their occupancy plummet.
Macquarie Goodman has a new building under way and further development plans. Valuation is back up to $54 million, occupancy about 96%, cap rate 10.5%.
A couple of doors along Great South Rd at Green Lane, Macquarie Goodman also owns the Millennium Centre, which has a 9% cap rate.
And, of course, Macquarie Goodman has bought that Otahuhu railyard site, in the middle of the isthmus, that nobody else wanted. Otahuhu will mostly be industrial, but like the others Macquarie Goodman has bought, it will be worked hard.
The landscape in which you invest is being altered by council plans which will make the status of neighbourhoods clearer, and in many cases more marketable.
The Auckland CBD is moving down Queen St, but the nature of changes to precincts around it may mean differentiation between Queen St yields and those elsewhere isn’t too dramatic.
Viaduct Harbour will soon have about two CBD towers’ worth of high-quality office space, Quay Park has one, Green Lane has several
Leasehold land makes the Viaduct different, but in general the non-CBD core precincts are getting strong yields
Apartment conversions, then the education sector, saved much of Auckland’s CBD from disaster, but the property industry still hasn’t taken hold of the education sector to ensure it hangs in. That job shouldn’t just be left to councils, or immigration consultants.
Australians have always played a major role in NZ property. Now there’s a new bunch in town and they’ve lifted action up a gear.