MHP Newsletter – December 2017

December 12, 2017

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Welcome to the final MHP Newsletter for 2017 – it’s hard to believe we are now on the final countdown to Christmas. This month we cover some new statistics on our management portfolio, two recent property sales which have resulted in excellent outcomes for investors, highlights from Colliers Valuation’s recent Property Council Christchurch Market Summit and a guest column from Crombie Lockwood.

We’d like to wish you all a happy Christmas and a well-deserved summer break – fingers crossed the sun will shine wherever you are.

Warm regards,

The MHP team.

Comments from Ron Mackersy

Since the last MHP Newsletter in September, we now have an established new political situation in New Zealand. Is it positive for property markets or not? In order to answer that question, we will first have to wait and see which promises will actually be delivered. Most of the promises will place a cost burden on the economy, rather than positively contributing to its growth. Property prices have peaked, particularly housing. However, commercial property still defies a reversal trend. Banks have money again – so competition will hold any rate increases for the time being. The new year will bring challenges to the economy from both internal and external forces – we will be continuing to watch China closely.

In the meantime, I would like to wish you all an enjoyable festive season and a restorative summer holiday.

News from Dale Robertson’s desk

We have recently produced some key statistics on our the 90-plus syndicate-owned properties in our management portfolio. The charts below demonstrate a good level of diversification across asset classes and locations:

Other key portfolio statistics include:

  • Average yield: 7.45%
  • Average building age: 9.5 years
  • Weighted average lease term: 8.3 years
  • Average LVR: 49.8%

These numbers demonstrate a portfolio of high quality overall: with modern building stock, long term tenants and a healthy LVR under 50%, which we actively work to maintain. 

Update from Mitchell Mackersy 

We have recently facilitated the sale of two earlier Mitchell Mackersy syndicate-owned logistics buildings: a 15 year old building in Christchurch and a nine year old building in the Auckland Airport precinct. Both sales (which are now unconditional) will realise significant uplift in capital value, with shareholders receiving strong annual returns on their original equity investments through the life of the investments.

These sales are good examples of how we are working together to take advantage of current market conditions to offer shareholders the opportunity to divest mature investments and recycle capital into new opportunities. On rare occasions there are situations where tenants do not perform as expected and which require attention to protect shareholder value. In these situations we work hard and do our best to achieve a positive outcome for our investors. Our recommendation is that investments should be spread across a number of different buildings to diversify location, tenant and industry type.

Some of our recent offerings include:

  • a warehouse property to be constructed in Invercargill for Brazier Scaffolding, a successful South Island business which will take a 10 year lease with fixed rental growth (oversubscribed)
  • an industrial property at 114 Taurikura Drive, Tauranga, occupied by logistics company Brett Marsh Transport and global baking industry manufacturer Bakels; both on long term leases with rights of renewal (fully subscribed)
  • a large warehouse in Mangere, Auckland, leased back to the existing occupier, Cardinal Logistics, for a 12 year initial term with fixed growth (fully subscribed)
  • an office building at 7 Show Place, Christchurch, occupied by Westpac on a 12-year lease as well as Spark-owned cloud services provider Revera (oversubscribed).

Health and safety update

New Hazardous Substances regulations now in force

On December 1 2017, new Health and Safety at Work (Hazardous Substances) Regulations came into force. The regulations apply to all businesses that manufacture, use, handle or store these substances – which is about one in three businesses in New Zealand.

The biggest change to Hazardous Substances Regulations is the requirement to have an inventory or register on all hazardous substances kept on site or in the workplace – no matter what the quantity. Contractors also must have a register of their own or be able to contribute to one on site.

Detailed information is available on the WorkSafe NZ website here.

For more information, please contact Anita Brosnan, MHP Project & Compliance Manager, email abrosnan@mhpl.co.nz.

Guest column from Crombie Lockwood

The insurance market remains destabilised and uncertain. Capacity is scarce in seismic zones, in particular Wellington. The second half of 2017 has seen major hurricane activity in the Gulf of Mexico, which is affecting the global reinsurance market for the January 2018 renewal season (currently being negotiated). How this will affect New Zealand in 2018 remains to be seen, but it is safe to say that reinsurance prices are likely to increase. 

Our insurance programme for MHP aims to insulate the property portfolio from market forces and achieve market-leading coverage and premium terms. The scale and subsequent buying power of the our insurance programme for MHP is unique in New Zealand, so we expect limited pressure on the broadness of cover and capacity across the portfolio. The annual renewal is set at March 31 2018 and insurer negotiations are well advanced.

Crombie Lockwood provides insurance across MHP’s entire nationwide property management portfolio.

2017 Property Council Christchurch Market Summit

The oversupply of new offices in central Christchurch is not as bad as anticipated, and the situation will continue to improve, according to Colliers Valuation director Gary Sellars in his annual address to the Property Council’s Christchurch market summit in October.

The vacancy rate for Christchurch CBD office property is 20 per cent, down from 23 per cent last year. Leasing activity has been primarily driven by businesses relocating within the CBD, as well as those moving back in from the suburbs. Rents are falling and landlords are competing to secure tenants. It will take up to 10 years for rents to rise again and for all the space to be absorbed.

While suburban vacancies are surprisingly healthy at 17.3 per cent, this will deteriorate as more businesses move back to the CBD. 

There has also been a sharp reduction in office construction activity as the CBD rebuild progresses.

Service provider profile

Gwynn Gilmour

Gwynn is an independent building surveyor, construction manager and quantity surveyor. He has worked with Mitchell Mackersy Lawyers and MHP for the past three years, assisting us in a variety of ways including:

  • providing condition reports to assist with due diligence on new acquisitions
  • maintenance planning on existing buildings in the portfolio
  • condition reports before new tenants move in and at lease end
  • assisting our Project and Compliance Manager with compliance issues
  • providing technical assistance to our property managers.

Maintenance planning across the portfolio is one area where Gwynn’s expertise assists us in managing property more efficiently. For each property, Gwynn forecasts maintenance costs out over a 10-year period. This provides a useful budgeting tool for property managers, enabling them to spread maintenance costs if necessary and minimise unpleasant surprises for landlords. 

Providing condition reports before a new tenant moves in is another crucial aspect. Thoroughly documenting the condition of a building at the beginning of a lease means the end of tenancy make good process is more efficient and streamlined.