Ministry head office on the move, big time

The Ministry of Social Development head office is on the move from the Bowen Campus behind Parliament to Unisys House on The Terrace.

Kiwi Income Properties announced on the NZX yesterday that it was planning a $67 million redevelopment of the 45-year-old complex after it secured an 18-year lease commitment from the government.

The lease on over 24,255 square metres of office space at 56 The Terrace will start in August 2016, said Kiwi Income Property Trust chief executive Chris Gudgeon.

The deal, the biggest negotiated in Wellington this year, was secured through the Government Property Management Centre of Expertise.

"This lease, along with the trust's commitment to the building's comprehensive refurbishment, serves to position 56 The Terrace as part of the Government's long-term Wellington office accommodation."

The building will be modernised to an A-grade standard, with building systems upgraded, new window systems fitted and office floors refurbished.

The building complex, which includes Aurora House, will be extended to increase the net lettable area of the building by approximately 10 per cent to 24,696sqm, providing floor plates of up to 1839sqm.

The ground floor lobby will be reconfigured to accommodate three retail tenancies and a new reception area.

The building will also be seismically strengthened to 90 per cent of new building standard from its current 70 per cent rating.

Construction is scheduled to start in October 2014, once all office floors have been vacated, and is scheduled to be completed in July 2016.

Unisys New Zealand has agreed to surrender its existing tenancy over 2403sqm.

Other tenants including Crown Law and parts of the Ministry of Building, Innovation and Employment have already vacated or are about to do so.

The new 18-year gross lease provides rights of renewal for a further 12 years.

The deal includes three-yearly fixed rental increases of 5.34 per cent and market rent reviews every six years, with a cap and collar arrangement.

Unisys House was bought by KIPT in April 2004 for $44 million and had a September 2013 book value of $51.2 million.

Gudgeon said that when the new lease starts in 2016 the building's projected value is projected to rise to $120m.

This would grow to over $130m by 2018 once the initial one-year rent-free period, granted as a tenant incentive, has elapsed.

The anticipated yield on total investment is expected to be approximately 7.5 per cent.

Gudgeon said the Government aimed to reduce the office floor space it leases in Wellington by 25 per cent, or 130,000sqm, with a strong emphasis on cost effective space balanced by a longer-term perspective on tenure and relationships with key landlords.

"This agreement with MSD positions 56 The Terrace as an important government building, and our investment in its modernisation ensures its attractiveness and competitiveness long into the future whilst providing the trust with the security of a long-term government rental stream."

Unisys House comprises two adjoining properties, a 19-storey office tower constructed in 1968 and Aurora Chambers, an eight-storey tower constructed in 1975.

Gudgeon said the property was ideal for government tenants as it was a short walking distance to Parliament.

The announcement raises questions about the future use of the Bowen Campus after the Ministry of Social Development moves out.

The ministry leases 92 per cent of the property on a lease that runs to 2015.

Bowen Campus owner Precinct Properties announced in September it was planning to spend up to $100m on refurbishing and redeveloping its property.

Precinct, formerly AMP New Zealand Office Trust, bought the campus in April last year for $50.4m.

However, its plans for the site suffered a knock last year when it failed to make the short list of developers to provide refurbished or new space for the ministries of Social Development, Health or Education.

But it will now be looking to secure tenants in a second round of leasings as the Government looks to find space for another 31 departments needing as much as 14.5 hectares of Wellington office space in the next five years.

Precinct chief executive Scott Pritchard said after the expiration of the ministry lease the company would refurbish or redevelop the campus.

The one-hectare site had 30,000 square metres of lettable space.

It has existing resource consent to extend that to 60,000 square metres.

Ideally the property would be occupied by government tenants, he said.

The 10-storey Bowen State Building and the 15-storey Charles Fergusson Tower were built between the early 1960s and mid-1970s.