property

Retail landlords must focus less on the bottom line and more on their tenants' needs or risk being lumbered with a portfolio of empty stores, say leading retailers.

High interest rates, a sluggish housing market, unprecedented fuel costs and inflated food prices have hit consumers hard, leaving all "but a lucky few" retailers juggling high rents and low sales. But with the gloom showing no sign of lifting soon, pressure is mounting on landlords to adapt to market conditions and work with retailers to see out the tough times.

Speaking at the Property Council's annual retail conference in Auckland, Stephen Alach, the general manager of surf retailer Amazon, said too few landlords appreciated how hard retailers were being hit by a downturn that extended from before Christmas. "All bar a few [landlords] don't look at anything except the dollars. They won't last if they continue with this ducking and diving attitude to tenants," he said. "Rent demands stay the same while some retailers are dealing with the reality of sales being up to 60 per cent down [on last year]. If the landlords don't react soon they are going to lose a lot of tenants."

Though retail giants like The Warehouse Group and Briscoe Group could survive the harsh times, independent retailers are more likely to "take their losses and walk away" rather than risk parting with more and more cash, Mr Alach says.

"It will be the landlords who feel the squeeze when tenants pull the plug and walk away. There needs to be a better understanding if we are going to get through this."

Landlords needed to spend more and think outside the box to draw consumers away from their comfy couches and plasma screens into the shopping environment, he said. This meant generating new store concepts with tenants, being more realistic about rental returns, and looking 10 years ahead instead of just one or two years.

"When you're caught in a wave, you can't breathe - you feel like you're choking. That's how it is for retailers at the moment, and that's how it will be for landlords if they don't react."

According to Statistics New Zealand, 15 of the 24 retail sectors had lower sales in the March quarter than in the last quarter of 2007. Those who are highly reliant on discretionary spending had a particularly tough year. Appliance stores experienced a 15 per cent fall in sales, furniture and flooring took an 11 per cent hit, and clothing lost 6 per cent.

New Zealand Council of Shopping Centres president Evan Harris said landlords needed to take a more "constructive" approach and "realise some of the pain" that retailers were suffering. However, John Bougen, director of national retail property developer Prime Retail, said the answer lay in fostering new tenants. "There will be demands for rent reductions. It's a call we will all be forced to consider over the next few months. The question is, `How long will it last?' Longer than a bank guarantee," he said. "[Landlords] need to consider fostering new tenants. They may not be the tenants you want in the good times. In the 1990s [recession], we had them on short-term leases so [that when things improved] they could be moved with dignity."

In a move which flies in the face of the economic downturn, Australian home improvement chain Bunnings says it plans to open six new stores in New Zealand, investing $90 million and creating 500 jobs.

The big-format retailer has announced expansion plans which show its retail outlets could grow from the current 16 to 22 stores - and then to 26 in the near future. Brad Cranston, general manager of Bunnings in New Zealand, said the business would open at Westgate in Auckland, increasing its footprint in Auckland to five big stores. West Auckland was a significant growth area, and the new store would have a hire shop, free DIY clinics, a children's playground, a cafe and two levels of carparking, he said.

Cranston was not concerned about the economic slowdown. Sales turnover was down on last year and same-store sales had dropped within the last two months, but Bunnings views New Zealand as an area of high growth, he said. The sales downturn was "something of a blip" and did not affect the firm's expansion drive.

Bunnings had invested more than $250 million in New Zealand this decade, Cranston said. The business started here in 2001 following the purchase of the Benchmark Building Supplies stores and now makes annual sales of more than $500 million, Cranston said.

Bunnings owned a new Nelson store and would own the new Westgate store, he said. The Westgate deal comes after a new large-format Bunnings store was developed in Nelson, where the retailer opened yesterday. Previously, the chain announced plans to develop stores in Gisborne, Wellington's Lyall Bay and Upper Hutt, and Dunedin. Some of its new stores cover more than a hectare.

Cranston said the business was also examining establishing a further four stores after that. Outlets in Hawkes Bay, Taranaki, South Auckland and the North Shore were quite on the cards, he said. However, plans for those areas were not yet finalised.

Cranston said Bunnings was showing confidence in the market with the new projects. Retail sales have been falling, in line with the shrinking economy, but he is confident about the retail niche Bunnings has carved out since coming here seven years ago.

"The creation of these 500 new jobs will have a positive impact on the community," he said. "As well as offering new employment, Bunnings Warehouse team members are encouraged to play an active part in their local communities by supporting local community groups.

Last year, Bunnings completed the sale and leaseback of 11 retail warehouse properties in Australia and New Zealand, netting A$203 million ($229.5 million). Auckland-headquartered Dominion Funds Management bought five New Zealand properties, while Australian fund Charter Hall bought the remaining six properties in Australia.

Bunnings is owned by Australian conglomerate Wesfarmers, and its main competitor in New Zealand is Mitre 10 Mega, which is also still expanding and aiming for 20 large-format stores.

Mitre 10 has been in New Zealand since 1974 when it was introduced by 15 hardware retailers who had watched the success of the retail formula in Australia. They felt it was time New Zealanders, too, were offered the cost savings achieved when retailers could pool their orders, buy in bulk and promote nationally, Mitre 10 says. More than 120 stores are operating under the Mitre 10 banner including more than 15 Mega stores.

BUNNINGS
* Opened in New Zealand in 2001.
* Has 16 large-format stores.
* Plans to have 22 stores soon.
* Melbourne-headquartered business.
* Became a public company in 1952.
* Founded by migrants from London.

Carter Holt Harvey's head office in Manukau has been sold to Australia's Valad Property Group, which is buying A$277.3 million of property from Carter Holt.

The 8.5ha site, legendary for once having a nine-hole golf course used by Carter Holt executives, is the jewel in the collection of properties sold. It is the biggest of five development sites being purchased. Billionaire Graeme Hart, Carter Holt's owner, is not commenting on the transaction.

Mark Frinsdorf, Valad's head of capital transactions, said sale and leaseback agreements would operate on most of the properties but the head office property was earmarked for development by Valad. He said no decisions had been made on what to build on the site, but a high-tech business park or a bulky goods/office precinct were possibilities. Valad had looked at the Lion Nathan brewery site sold in Auckland last week but had decided on the deal announced yesterday. "We do think it is a very strategic site," Frinsdorf said.

The portfolio purchased includes 15 Carters building supplies sites, which are subject to nine-year sale and lease-back agreements with two six-year rights of renewal. Similar terms apply to 10 packaging plants in the deal, five of which are in Australia. Valad will earn a yield of 7.1 per cent on the properties. The company already owns buildings in New Zealand, including Maritime Towers in Wellington and West Plaza in Auckland.

The run of bad luck at a new Pak'nSave supermarket in Auckland has
worsened as a fire station abandons plans to shift to the site and
contamination issues are discovered. The New Zealand Fire Service
has scrapped plans to shift its Takapuna base to an area of the site
alongside the new supermarket, which has stood empty for two years
because planning consents were found to be invalid. The Fire Service wanted to develop a new two-unit station beside the controversial and still-unopened store on Wairau Rd.

The service had struck a deal to buy part of the site based on an
arrangement that supermarket giant Foodstuffs would secure valid
planning consents. The service regarded the site as the best location
for its regional North Shore base. But two years of delays have now forced the service to drop its plans and look elsewhere.

In another blow, a small area of subsurface ground contamination from
drycleaning fluids and printing inks has been discovered on the site. During construction, Foodstuffs found the noxious substances,
thought to have come from run-off of neighbouring businesses which have
now departed.

The latest developments add to Foodstuffs' problems
with its Wairau supermarket, dogged by an 18-year battle to begin
building, then hit by a fire caused during construction, and subject to
a legal dispute with rival Progressive, owned by Woolworths Australia.

Kevin Stacey, the Fire Service's national manager of strategic assets, said a
search was now on for other sites in the Takapuna area. "I guess we're disappointed in terms of the time it has taken." Murray
Jordan, general manager of property development at Foodstuffs, said
delays had deterred the Fire Service, which had now scrapped its plans
to shift to the site at Wairau and Porana Rds. "Due to the continued delays, the Fire Service has decided not to
proceed with its plans to relocate the Takapuna Fire Station to the
site, but will pursue other options for relocation," Jordan said.

Foodstuffs has battled for 20 years to open the new store, which has been built by Fletcher Construction.

Foodstuffs subsidiary the National Trading Company got resource consent for the
store and a two-appliance Takapuna station and North Shore Fire
District headquarters on the corner site But Progressive took
the case to the High Court, asserting North Shore City was wrong to
grant Foodstuffs a non-notified consent. The High Court ruled the
consent was invalid. Foodstuffs was about to take the case to the Court of Appeal last year but then abandoned that plan.

In December, the council decided to process a new resource consent
application on a limited notification basis which meant only the
immediate neighbours would have a chance to object, and Progressive
would be locked out of the process.

Foodstuffs has applied to the North Shore and Auckland Regional Councils for new consents.

Supermarket sorrows

Pak'nSave at Wairau Rd has been dogged by a series of misfortunes:

• An 18-year battle to begin building on the site.
• Fire engulfing the building as it was being finished.
• A legal wrangle which has kept the store shut.
• Abandonment by the Fire Service, which jettisoned its plans.
• Contamination of the site, discovered during construction.

The Warehouse Group Limited ("WHS") today announced that it has reached an unconditional agreement to sell its 50% interest in "The Base" retail complex at Te Rapa to Tainui Group Holdings Limited ("TGH") for a gross consideration of NZ$37.4million.

The Warehouse entered into a 50/50 joint venture in 2003 with TGH, the commercial arm of Waikato- Tainui, to develop "The Base", a 60,000 square metre retail complex, north of Hamilton.

Commenting on the acquisition by Tainui Group Holdings, Mike Pohio, Chief Executive said "we would like to take this opportunity to thank The Warehouse Group for the very positive and constructive relationship we have had with their board and management team over the past four years".

In commenting on the sale, Ian Morrice, Managing Director of The Warehouse Group said "The Base development has been a successful venture for The Warehouse, and is the site for development of our existing store into the third Warehouse Extra. We thank Tainui Group Holdings for their professionalism and support in successfully establishing The Base as a significant retail destination in the Waikato area".

The settlement is scheduled to take place in July 2007. The Warehouse Group will report an after tax surplus on divestment of between NZ$11.8 and NZ$12.4 million in the 2007 financial year.

A $228 million sale and leaseback deal has boosted Australasian hardware chain Bunnings' property development profits by up to $40 million.

The sale of 11 retail warehouse properties in Australia and New Zealand to investors Charter Hall and New Zealand's Dominion Funds was announced as part of the company's capital management programme.

The New Zealand portfolio comprised five properties in Wellington, Hamilton, Palmerston North, Whangarei and Rotorua, and was bought by Dominion for $82 million.

Dominion Funds chief executive Paul Duffy said the price was a good deal. "We're very satisfied with that. It's good for our investors - that's the fundamental thing we have bought here."

The properties were all on main arterial routes and came with 12-year leases and rights of renewal.  With a property investment portfolio of about $900 million, the deal was not huge for Dominion, Mr Duffy said, but was significant in the partnership with Bunnings.  "It's an important one. We're looking to do further business in partnership with them, in other stores throughout New Zealand as they expand," he said.

Charter Hall property fund bought the Australian properties.

Bunnings said the sale would lift profits from property development reported in the second half of the 2006-07 year to more than A$42 million (NZ$46.8 million), A$36 million (NZ$40 million) higher than in the previous six months.

With 11 new stores in New Zealand in the past four years, Bunnings was targeting four new large-format stores each year, its New Zealand property manager, Dan Kneebone, said.

"The New Zealand market has accepted our offer pretty enthusiastically, so we're just responding to demand," he said.  New stores in Mt Roskill, Christchurch and Nelson were planned in the next 12 months.  "We have quite a bit of property in the landbank."

Bunnings bought a site next to Wellington Airport two months ago, but no date had been set for construction of a new store.

Mr Kneebone said the Bunnings concept was all about large-format stores that could offer a competitive range and low prices.  Since buying Benchmark in 2001, the company had invested more than $100 million to develop 13 large-format Bunnings Warehouses, and was progressively redeveloping 25 smaller stores into warehouse-sized outlets.

A verdict should at last be delivered in the coming week by the Commerce Commission on whether Foodstuffs or Woolworths will be allowed to buy The Warehouse.

The commission has now been considering the matter for close to six months. A "no" seems the most likely outcome, given the time taken, but nothing is certain here.

If the commission decides that it can't make a "no" fly through the bumpy process of appeals and court action that would follow such a verdict, then it might yet produce a "yes".

But given that the commission seems to be against either of the supermarket companies acquiring The Warehouse, the key point is whether it has the appetite for a big battle on this one.

A fledgling flutter

The Xero float is an interesting one, but comes too soon in the company's life for "mum and dad" retail punters.

Xero plans to sell Internet-based accounting software to small and medium businesses through monthly subscriptions. Co-founder Rod Drury has had previous success, selling e-mail business AfterMail to America's Quest for $65 million last year. Securing Trade Me founder Sam Morgan as an independent director adds tremendous credibility.

Xero cites salesforce.com, a US$5.6 billion New York listed sales force automation software provider, as one company successfully pursuing its planned business model. But Xero reckons its big international rivals, MYOB, Sage and Intuit, aren't well placed to adopt the Internet business model, which provides lower infrastructure costs and predictable revenue.

Xero decided to float, rather than seek private funding, for greater credibility when expanding overseas. It sees immediate New Zealand market potential of $90 million. It plans to open shop in Australia, where it sees three times as many customers, and Britain where it sees 13 times as many. The directors don't expect profits for at least three years, and don't anticipate paying dividends for the foreseeable future.

In the nine months to March Xero lost $1 million before tax and cites equity of just $1.7 million. It's similar to a venture capital investment opportunity.
-GARETH VAUGHAN

Shelling out

A great, if hazardous, pastime of the 1980s is back. It's called "spot the shell company and make a pile".

Anybody fortunate to have climbed into listed shell Vistron's shares at 24 cents each recently will have been gratified by the four-fold increase in their value in the week and a half since aggressive Queensland investor and financial services company MFS announced it was reversing its New Zealand arm into Vistron.

At the moment, Vistron is essentially an empty vessel, with a group of shareholders and a sharemarket listing. It is 70 per cent owned by sharebroker Brett Wilkinson, who has seen the value of his holding increase by about $2 million.

Till the details of the reverse takeover by MFS New Zealand are revealed, punters are guessing a bit about the likely value of the Vistron shares after the deal is done. But that's not the only punting going on. Holly Springs Investments is another listed empty vessel – also 70 per cent owned by Mr Wilkinson.

Its infrequently traded shares changed hands at two cents each on April 13. But when they next traded on May 21 – the day before the MFS deal with Vistron was announced – the price shot up to 10c. Subsequently the price has topped 30c, on very small volumes. One to watch, perhaps.

Having pie but not eating it

Unitholders in listed property trusts are set to benefit when the Government's new portfolio investment entities (PIE) tax regime comes into effect on October 1.

Under the new rules New Zealand investors will pay no further tax on cash dividends. But, according to ING Property Trust chairman Michael Smith, the changes have yet to be fully reflected in INGPT's unit price.

And you could probably say that about a couple of the other trusts as well, he believes. Four of the bigger trusts, ING, Kiwi Income, AMP NZ Office and Macquarie Goodman, are still trading below their net asset backing per unit.
-ANDREW JANES

Kiwi Income Property Trust will focus on developing its existing portfolio this year rather than looking at major acquisitions.

Angus McNaughton, chief executive of the manager of the trust, said continued demand from overseas and New Zealand investors was making it harder to acquire assets.

Kiwi reported a $59.2 million after-tax profit for the year ending March 31, compared with $72.1 million the previous year. Excluding a $15 million one-off gain from selling the AUT building and its Capital Properties stake in the March 2006 year, after-tax profit was up 3.7 per cent.

The trust will pay a final dividend of 4.85 cents per unit, bringing the total dividend for the year to 9.6c.

During the year, Kiwi opened the first three stages of its Sylvia Park Mall, New Zealand's largest, in Auckland. Stage four, 40 more stores and a rail connection, is due to open late next month.

Kiwi also owns a mix of shopping centres and office buildings, including the Vero Centre in Auckland, the Majestic Centre and Unisys House in Wellington, and the Plaza Shopping Centre in Palmerston North.

Early this year the trust recorded a revaluation gain of $219.8 million, bringing the total value of its portfolio to $1.9 billion.

This year the trust's New Zealand unit-holders will benefit from a new tax regime for portfolio investment entities such as the trust. The regime takes effect from October 1 and will apply to both of the trust's dividends in the March 2008 year.

New Zealand's biggest property company says high demand from offshore investors is making it difficult to acquire new assets.

Kiwi Income Property Trust [ NZX : KIP ] reported revenue of $59.2 million for the year to March 2007.

Profits rose by four per cent over the previous year after the removal of a $15 million gain from the previous year is taken out.   A $220 million revaluation on its portfolio earlier this year lifted its total value to $1.9 billion.

Chief executive Angus MacNaughton, says New Zealand property is particularly popular among foreign investors at the moment.  Mr MacNaughton says completion of the Sylvia Park shopping centre in Auckland has been the company's main focus over the past year.

The Centre has now been valued as an investment property worth $422.7 million, giving it a current year revaluation gain of $47.6 million- ahead of the projected revaluation gain of $6.0 million.

Westfield is selling two large Auckland malls for more than $300 million as it concentrates on newer development opportunities nearby.

Justin Lynch, Westfield's deputy director, said the Pakuranga and Glenfield shopping centres were for sale.  "It's our normal business practice to review our properties for opportunities to generate higher returns for shareholders," Lynch said.

But Westfield has rarely sold in New Zealand. After taking over St Lukes Group last decade, it embarked on a plan to spend $1 billion in 10 years, vastly increasing its power and presence here.

Westfield has spent about $200 million expanding the two malls in the past decade.  Competitors said yesterday Westfield was selling to quit small malls with no further development potential.

The new Albany mall it was building would threaten Glenfield's primary and secondary retail catchments, one said.

Westfield also said this week it would spend $70 million expanding Manukau, adding a new SkyCity cinema complex, 35 new shops and more parking and the competitor said it was now even more obvious why Pakuranga was on the block.

"Westfield would be shooting themselves in the foot if they kept Pakuranga, because Manukau will eat into its catchment."

Westfield is the world's largest mall owner, with 121 centres worth $67.8 billion in Britain, the United States, Australia and New Zealand.

Lynch said yesterday that the firm had already spent $700 million here and would spend a further $600 million in the next five years.

Westfield had conducted a secretive marketing campaign for the two malls, forcing prospective bidders to sign gagging agreements.  One prospective bidder said he was able to look closely at the malls only after signing a confidentiality agreement drawn up by Westfield's lawyers Russell McVeagh.

Colliers International's top agent John Goddard is handling the deals and large Australian and European institutional or superannuation investors may bid. Wholesale AMP funds, Australia's Centro Properties or German investment funds are also said to be interested.