South Island property investors head north

South Island money is continuing to flow across Cook Strait with another substantial Auckland property selling to investors from the Mainland.

The latest sale is the BJ Ball building in the Southpark industrial estate in Penrose, which has been bought by South Island company Milson Brown for $19.35 million.

Milson Brown is owned by Southland businessmen Keith Brown and John Patterson and the BJ Ball building is one of three properties the company now owns in the Southpark estate. The other two are a vacant site next to the BJ Ball building and another large industrial building a few doors along.

All three were purchased from Quensell Services, a company owned by Southpark's developer John Sax.

The latest purchase follows hard on the heels of the sale of the former Auckland Regional Council headquarters at 21 Pitt St in Auckland's CBD (now called Beca House) for $55m to Viewmount Orchards, a company owned by Christchurch-based property investor Miles Middleton.

Much of the money flowing into Auckland is coming from investors who have received insurance payouts for Christchurch buildings destroyed in last year's catastrophic earthquake and are choosing to reinvest the money outside of the Canterbury region.

Middleton owned one of the biggest commercial property portfolios in the Christchurch CBD, including the 14-storey Westpac building on Cashel St, one of four properties he lost to the wrecker's ball after the quake.

Last year he signalled his intention to reinvest much of his insurance money in Auckland or Brisbane and he appears to have paid cash for Beca House, which is mortgage free.

Other South Island investors such as Milson Brown have had a longer presence in Auckland's commercial property market.

In 2009 Milson Brown paid $12.3m for an industrial property in East Tamaki, then sold it back to the original owner, Direct Property Fund, earlier this year for $12.95m.

Sax's Southpark Group purpose- built the BJ Ball property in 2009 specifically for the tenant, New Zealand's longest established paper merchant, which uses it for warehousing and its head office operations.

Paddy Callesen, the managing director of commercial real estate company Savills which handled the sale of the building, said BJ Ball's lease still had nine of its original 11 years to run and also provided two rights of renewal of six years each.

The purchase price of $19.35m provided Milson Brown with a yield of 7.75 per cent, with potential for income growth as the rent was periodically adjusted to market rates.

Callesen said it was an attractive investment because it was built when the property market was depressed and the rent reflected the cost of the land and buildings without the development margins that would have been included when the market cycle was more buoyant.

"It's the ideal long term portfolio property," Callesen said.

"If an investor was going to keep anything it would be a similar property. There are not many that fit the criteria and they are sought after and often command a premium."

Callesen said Savills was regularly dealing with investors from Christchurch.

Many were cashed up after receiving insurance payouts and, although they remained committed to Christchurch, they also wanted to spread their risk by investing some of their money in commercial property in other places, Callesen said.

But they were having to compete with other investors to get something suitable.

Savills broker Kevin Richards said with property yields at seven to eight per cent compared with bank deposit rates which were expected to remain around 5.5 per cent for the next couple of years, it was a very competitive market.

"There is a dearth of quality properties available to buy. Many properties that were proposed for sale are no longer available. The problem is that very few owners want to sell," Richards said.

"Those who may have sold two years ago, now have low interest rates which cover their borrowings comfortably, plus there's now the expectation their assets will appreciate."

Savills valuation director Steven Dunlop said high demand from investors coupled with the low supply of quality properties were forcing down yields. At the same time, commercial property prices weren't increasing because rental growth was reducing.

Dunlop believes that could lead to a structural change in the market as people came to expect lower yields and lower rental growth, while low interest rates persist.

Many investors were selling their lower yielding properties and using the money to upgrade and increase the capital value of the remainder of their portfolio, or reinvesting the money into higher yielding properties, he said.

But investors and real estate agencies alike were finding it difficult to source suitable stock.

However, although the market was tight, the mood of investors was better than than it had been for the last two or three years, as everyone started to adjust to the changing environment, Dunlop said.

Sunday Star Times