Auckland, 30 August 2014 - Brent McGregor, Senior Managing Director of CBRE New Zealand, says that the recent volume of major Auckland office building sales is likely to find a new course, due to a number of factors.
The announcement last week of the sale of AECOM House on the fringe of the Auckland CBD means that McGregor has been involved in the sale of more than $500 million of commercial property this year alone.
“I am pleased to say that CBRE has been involved in the majority of major Auckland CBD deals concluded this year,” says McGregor. “While there have been some major sales that have hit the headlines, there are also numerous transactions that are not yet public.”
McGregor says that he anticipates the number of major Auckland office deals to slow and investment capital to move in a new direction towards the end of 2014.
“The ever-tighter investment market we now inhabit in Auckland due to the weight of capital, along with the number of office buildings being converted to residential use, is adding stimulus and viability to commercial development, which is good for future investors. It is also shifting investor interest toward development and into other major centres, including Wellington, which is now already the focus of numerous major marketing campaigns.”
Sold to underlying landowner Ngāti Whātua Ōrākei Whai Rawa Limited, AECOM House is the latest in a line of recent major transactions. CBRE was also behind the sale of the former National Bank Centre at 205 Queen Street, which was sold for $103 million.
The $84 million sale of Chorus House on Wyndham Street in Auckland’s CBD was announced in May, in a deal brokered by McGregor, Warren Hutt and CBRE’s Christchurch Managing Director Mark Macauley to a private Christchurch-based investor.
In mid-July, through CBRE, noted Wellington property investor Caniwi Capital acquired a portfolio of six Inghams Enterprises chicken farming properties for $57 million from the private equity owners. The properties include four breeder farms, a hatchery and a processing plant, all in the Waikato region.
Other big sales that have made news in the market include the April sale of 125 Queen Street for $57 million, and the latest news, of the confirmation by Dexus Property Group on 14 August that it has sold the Lumley Centre at 88 Shortland Street in Auckland to German pension fund Deka Immobilien Investment GmbH for circa7% yield at $146 million, subject to OIO approval.
To bring this German purchaser to New Zealand, CBRE’s local team worked together with their Sydney-based International Investments team, led by Rick Butler.
“One of our Kiwi colleagues is working in the off-shore team based in Sydney, which helps with attracting new capital to New Zealand,” says Butler. “Deka has €16 billion of property assets under management and is an active property investor. This was CBRE’s eleventh deal with Deka, but their first in New Zealand.”
“Much has been written recently about the attractiveness of New Zealand property to overseas investors,” says McGregor. “While some of the press hits the nail on the head, with a net $188 million inflow of foreign funds into New Zealand property in the first half of 2014 as New Zealand yields are undeniably attractive to European and Asia-Pacific institutions, it’s worth remembering that many local investors are active too.
“For example, AECOM House was sold to Ngāti Whātua Ōrākei Whai Rawa Limited. Maintaining long-term New Zealand ownership was certainly a key factor in the sale from the perspective of its previous owner, Harbour 5, which continues to retain other holdings in the precinct and sees this transaction as a further positive step in its strong relationship with Ngāti Whātua. Chorus House was also acquired a New Zealand investor.”
McGregor says that AECOM House can in many ways be seen as a case study of some of the current market threads: the link between increasing development and investment sales.
“The previous owners of AECOM House, Harbour 5 Limited, part of a family owned business which purchased the land in 2008, progressed the eight-level 5 Star Green Star Rated building in 2011 with the intention of holding the asset long-term. However when an opportunity arose for a negotiated sale with the underlying land owner, Ngāti Whātua Ōrākei Whai Rawa Limited, the directors felt this was an excellent prospect for both entities, the building’s tenants and the wider precinct in general.”
“The opportunity also made real sense for the local Iwi which has picked up the marriage value benefit from combining the lessee’s and lessor’s interest.”
McGregor says that the buoyancy of the development market is evident.
“Towards the end of 2016 we expect the completion of over 85,000sqm of newly built and substantially refurbished office space. These projects – which include new campus-style fringe CBD office premises such as Manson’s new 18,600sqm building on Victoria St, and Fonterra’s new head office in Wynyard Quarter – will fill a number of market niches.
“Wynyard Quarter is becoming a major focus for new office supply. Aside from the Fonterra building, an additional four projects are expected to add over 20,000sqm by the end of 2016 to Wynyard Quarter’s office stock. Unlike the large campus style buildings, some of these new Wynyard premises will offer occupancy options for smaller to medium sized occupiers, some of it in “character” style premises.
McGregor says that another market niche being filled by new supply is core CBD refurbished secondary buildings.
For example, the refurbishments of 125 Queen St and potentially 22 Fanshawe St will bring on the market about 25,000sqm of good quality occupancy options in 2015 for those seeking Core CBD tower style office space.
“However, the main market niche that is not currently being addressed by new supply is premium quality CBD office towers. This market sector has been inactive for new development during the past five years, and no new meaningful supply is expected until the latter part of this decade.”
However, it is not all new development from scratch says McGregor, as investor interest is being driven as much by yields as by office buildings being converted to apartments.
“We are seeing quite a few local and offshore groups wanting to buy into development sites – city and suburban – with mostly residential underpinnings. For this reason and others, we are observing a rising number of conversions, typically from secondary grade office buildings into residential uses.”
One prominent building undergoing such a transformation is the former Telecom headquarters building at 8 Hereford St in Freemans Bay. Bought by the Tawera Group, an award-winning developer. A significant number of the 121 apartments now being planned in the new Hereford Residences development have been pre-sold, leading to more than 10,000sqm of B grade office floor area being withdrawn from office stock.
“All this conversion work is undoubtedly putting pressure on existing stock and thus on vacancy, which is already low in Auckland.
“Auckland has been the popular investment destination year to date but investor focus is now shifting to include other centres, including Wellington, where good buying opportunities exist.”
McGregor says that Ryan Johnson, CBRE’s Wellington Managing Director, has recently returned from a visit to Singapore, where interest in New Zealand commercial property continues to be strong.
Johnson says that the Singapore government is trying to cool the market locally. “The cooling tools include increasing stamp duty and putting in place other LVR restrictions. Therefore foreign capital is looking elsewhere to invest and Australia and New Zealand are attractive options.”
Johnson says that this has led to a noticeable jump in investor interest in Wellington recently. “Three months ago there was little institutional interest in Wellington. However, now yields are more attractive at around 8.5-9.5%, interest is rising from institutional, Australian, Singaporean and Chinese investors.”
As for the outlook for deals in Wellington in the second half of the year, Johnson says that the interest being shown is translating into activity already, as his office is currently working on ten different, mainly sole agency, campaigns at the moment totally around $225 million.
“CBRE has control of a lot of stock. Our sole agency on the IBM/Datam house in Petone had more than ten offers, half of which were offshore investors. Other campaigns currently on the market are 1 Victoria Street (sold on behalf of ANZ bank) and Trade Me’s headquarters, which are generating significant interest.”
Furthermore, in Christchurch, a fully leased five storey office building redevelopment has recently come up for sale at 104 Victoria Street, marketed by Macauley.
The property occupies a net lettable area of approximately 3,473sqm with typical floor plates of 676sqm. The building has four floors of office accommodation tenanted by California-based logistics software company Telogis and the ground floor contains a Tony Astle restaurant and boutique gym.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through approximately 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.