Kiwi Property drops the value of its commercial property assets by $290 million

Property

Regional shopping centres have suffered the biggest decline in value while office buildings with government tenants have increased in value

20th Apr 20, 11:09am by Greg Ninness

One of the country's largest commercial property investors has reduced the value of it assets by almost $300 million as the effects of the COVID-19 lockdown start to bite.

NZX-listed Kiwi Property, which owns some major properties around the country including the Sylvia Park shopping centre and Vero office tower in Auckland and the Aurora Centre in Wellington, has revalued its property assets downward by $290 million (-8.5%).

The biggest hit was to the company's Mixed Use Portfolio, which includes the Sylvia Park and Lynmall shopping centres in Auckland and The Base retail centre in Hamilton, which was devalued by $177 million (-10.6%) to $1.499 billion.

The Mixed Use Portfolio accounts for 48% of the company's total portfolio.

The Retail Portfolio, which includes several regional shopping centres, was devalued by $126 million (-20.8%) to $481 million.

The company said its regional shopping centres had been the hardest hit of all its assets by the lockdown.

However office assets proved more resilient, underpinned by long term leases to government agencies in some of them.

The Aurora Centre and 44 The Terrace in Wellington increased in value by 7.1% and 7.4% respectively, while the Vero Centre in Auckland decreased in value by 1.7% and the ASB North Wharf complex at Viaduct Harbour increased in value by 3.1%.

The overall effect of the revaluations was to increase the company's portfolio capitalisation rate (yield) from 5.99% to 6.11%, while Net Tangible Asset backing decreased from $1.42 per share to $1.24 per share.

"The significant uncertainty caused by the coronavirus has prompted valuers to include an assessment of its effects on property values," Kiwi Property chief executive Clive Mackenzie said.

"As a result, their assumptions around rental growth, vacancy, downtime, leasing up allowances and trading conditions have all softened.

"The challenging investment market conditions and an expected decline in capital inflows are also contributing to an expansion in capitalisation and discount rates.

"This uncertain environment is likely to continue for some time.

"We will regularly review further changes in asset values and make additional announcements as appropriate," he said.

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35 Comments

by Mark Hubbard 1965 | 20th Apr 20, 11:24am 1587338695

Interesting: conforms with PWC paper a couple of weeks ago, where retail expected to be hardest hit, then office and most resilient industrial. So KIP office property values are actually up ... be interesting to see what does happen to industrial spaces.

by Ocelot | 20th Apr 20, 3:37pm 1587353824

This lockdown is making many businesses aware that people can be entirely functional working from home. I expect to see a lot of businesses downsizing their office spaces after this, and more becoming shared space offices for when people need to go in.

Industrial may increase as globalism pulls back a little.

by Ahuhyeah | 20th Apr 20, 3:50pm 1587354604

Does that mean those businesses with compensate their workers for their provision of office space, wear and tear, power, internet and the critical coffee?

by Good Samaritian | 20th Apr 20, 9:40pm 1587375639

Wishful thinking here.

Once the numbers are such, employees may then be able to negotiate better arrangements. The obvious start to being compensated for home office use is when negotiating new employment contracts.

In addition, any employee that wishes to work from home would have to prove work ethic and productivity before I would give them the option. Alot of people lack self motivation, and need to kept an eye on to ensure productivity. Larger businesses are packed for of them, as its easier for them to hide.

Government and Council are full of them, where there is low productivity and even less accountability.

by bloodymigrant | 20th Apr 20, 11:26am 1587338775

This is just beginning. Much more to come..

by Roger the lodger | 21st Apr 20, 9:41am 1587418913

Yes I would say the retail and office market is toast. The model of relying on the protection of council zoning to boost rentals for shops and businesses has left the sector very exposed to a downturn. It is difficult to see how major tenants like David Jones and H&M will survive the downturn. DJ's were in trouble before the virus. A lot of international chains will close or pull out on NZ - and local franchisees and independents will just close if there is no money to be made in the next few years. Most owners have their assets in trusts. The majority of the property syndicates are geared 50-60% - so the equity of them will be destroyed. Hotels are gone. Wellington buildings are uninsurable. People like working from home now. Plus forced sales will set the new market level which will drive down valuations and trigger equity top ups.
Its a total disaster for property.

by richard1965 | 20th Apr 20, 11:30am 1587339055

When the world is falling apart, to expect retail to boom or be immune to chaos all around is being stupid just like housing market - current lock-down is a blessing in disguise for housing and commercial sector as in freeze mode, slide in price is not visible as have freezed and the real impact will be felt after the lock-down - may be after a month or two as intially many pending deals will be executed at pre virus / high price which will be thrown by RE Agent to prospective buyers to prove that housing market is not effected and try to create FOMO.

SO BE AWARE.

by Keen Observer | 20th Apr 20, 11:47am 1587340057

Remember folks, PM already remind us that.. just because of loosing jobs, people should not be forced to sell their house/s. Albeit overleveraged borrowing process for both private and commercial. The Banks are left alone with their own 'self prudent' regulatory loan systems, any respectives govt watched from sidelines as 'it's a free market at play' - The indication for NZ is always the past 30years, as PM hinted - All the losses should always be bail out by future tax payers, this should never change - so? as Orr's stated, use the current bail out/subsidies to immediately service those loan, pay the private/commercial landlords. Click buy now that property online, as when the lockdown ends - what left is just those looser savers, have to pay the bail out tax.

by Wrong John | 20th Apr 20, 11:54am 1587340483

As a loser saver this concerns me. In fact, after the govt removed my livelihood & my freedoms & then the banks step in to remove my savings (after working hard for 40 years) I'm a little perplexed as to where I went wrong. It's a strange world that's for sure.

by Keen Observer | 20th Apr 20, 1:35pm 1587346509

Unfortunately LJM, you're not alone here - I merely stating the factual 'what is going to happen' in the near term economic future of NZ, all those that can understand the clear message here and should be able to plan what it is necessary for own private affair. Any respectives govt at the helm has been herded worldwide to accept this neo-liberal clinch of F.I.RE economy - print money, borrow/loan, subsidy, spend.. all? for purpose to channel those 'wealth saving numbers' into properties/RE/land asset valuations. Future generations? - c'mon it's an old school.

by firsthomecryer | 20th Apr 20, 3:41pm 1587354091

You're not alone. Another debt-free 'loser' saver right here (without a house of course).
Hope we don't get punished for being prudent, and not getting into scary amounts of debt.

by CN | 20th Apr 20, 12:19pm 1587341958

"The Retail Portfolio, which includes several regional shopping centres, was devalued by $126 million (-20.8%) to $481 million."

If the property investment companies are revaluing properties downwards - especially retail.

What happens to banks who have made mortgage loans for commercial property (especially retail) to the mum and dad investors who have recently bought commercial property?
If the borrower were at the maximum LVR of 65% before the revaluation by the bank, the borrower may find themselves under potential cashflow pressure

Lets take an example:
Property valuation: 100
LVR: 65%
Mortgage: 65
Equity value: 35

Bank property valuation valued down by 20%
Property value now 80
Maximum LVR 65% would be maximum debt of 52 vs existing mortgage of 65
Reduction of mortgage needed to maintain maximum 65% LVR is 13.
Where will the commercial property owner get the $13 required to reduce the mortgage?

by sharetrader | 20th Apr 20, 12:28pm 1587342516

in theory leasing costs should also reduce so we could see a devaluation over time in income as most people have written into their contracts an equation that takes in cost of capital and inflation.
as they are a public company they will do a capital raise to restore balance on the books, same as to what happened during the GFC

by Houseworks | 20th Apr 20, 7:17pm 1587367030

From memory they raised 200m mid 2019 and have recently extended their debt facilities for a few more years... no need to raise more but can never have enough I guess :)

by Mark Hubbard 1965 | 20th Apr 20, 12:27pm 1587342428

Your math is right, however, certainly none of the listed REITs - without going to have a look - would have LVRs anything like 65%. I suspect most are between 30% and 40% ... I'm in an unlisted commercial property fund and as of December their LVR across about 17 buildings was 35.8%, and I note it was coming down over time ... possibly the banks learned from over-extending into the dairy sector so have pulled back across their loan book.

by Mark Hubbard 1965 | 20th Apr 20, 12:30pm 1587342605

... adding to my comment above, noting that as long as central banks can retain control of the Frankenstein markets they've created, we're in a very low interest environment for years, which over time works for commercial property valuation (and cashflows). I think the KIP revaluation chiefly shows that valuation is building by building and tenant by tenant (as well as by sector).

by THE MAN 2 | 20th Apr 20, 12:34pm 1587342886

A commercial property’s value is normally determined by a rental yield.
Our valuation on our industrial property won’t drop as our rental term is for a long time plus 2 rights of renewal as well.
Long term company manufacturing and haven’t been shut down so income just fine!
Yes retail landlords will suffer but to be fair, they have taken on that risk and generally get higher returns when leased

by Mark Hubbard 1965 | 20th Apr 20, 12:50pm 1587343832

Yes, agreed. And with the lowering interest rates you'll probably increase value as the lower the interest costs the better the yield. The PWC paper out two weeks ago was interesting on the challenges facing commercial property valuation: but even that said good industrial properties were best placed - you can't take your factory to your employees home office so long term trends won't affect it, as opposed to retail taking a hit from online sales :) - they then ranked office properties second with good long term esp government tenants - which is why KIP's office assets gained $15 million - but for obvious reasons retail at the bottom ... albeit, all else aside, I can't wait for hospitality properties to get opened again: socialising at restaurants, etc, important to our enjoyment of life.

by Good Samaritian | 21st Apr 20, 7:33am 1587411198

You'd have to be naive not to recognise industrial property is going to take a hit.

Some are occupied by importers, and in a recession their businesses get hit two ways. Consumer spending gets restricted to essential items, and our exchange rate falls relative to stroner trading partners, meaning the price for imports goes up. While there are a few others, oil falls into those essential items.

by Sluggy | 20th Apr 20, 1:00pm 1587344457

Wouldnt the lease have regular reviews, 2 yearly max ? Any lease Ive ever signed is based on a market valuation at reveiw time (some are cpi) ie if the market is down the rental is down.
Right of renewal is meaningless, thats a tenants prerogative, if old mate around the corner is 40k less per annum, you would need to meet the market or lose a tenant ?
Im picking a ton of SME's go to the wall over the next 6 months = a ton of commercial vacancies = more competition to lease = less moolah

by Mark Hubbard 1965 | 20th Apr 20, 1:30pm 1587346206

No issues with that. I think the KIP valuations show on top of all else it's building by building and tenant by tenant. The unlisted fund I'm in has a weighted average tenancy period of over 7 years, so on basis most are good tenants, and it's mainly industrial and office, with that time frame I'm hoping not too much damage. But there well could be. This crisis is a huge event, which one day the NZX and US bourses will finally figure out.

by middleman1 | 20th Apr 20, 2:04pm 1587348287

KPG's bank debt covenant trigger is 45%, they were at 30% before this latest revaluation, with $300m undrawn credit. Freeboard, but not what you'd call comfortable. They have no bank debt maturities until the end of 2023 and should be able to grind through the recession given big brand tenants. Currently at $1.00 to the revised NTA of $1.24 perhaps suggesting the market has priced in this news. There are more attractive options for REIT investors.

by Mark Hubbard 1965 | 20th Apr 20, 5:05pm 1587359116

Agree on last point. ... KPG were fortunate going into this with a pretty low LVR ... set to get a bit higher now though, but as you say, they've still got plenty of wriggle room.

What would be your favourite three REITs currently?

by middleman1 | 20th Apr 20, 8:59pm 1587373149

Mark. As part of a general portfolio defensive repositioning over the last 18 months I rebalanced to favour industrial and office over retail and also reduced exposure to wellington due to EQ risk. I hold a spread, with GMT, PFI and PCT featuring prominently. I also have VHP as a security blanket. In addition a KPG tranche but it's modest due to previous reservations about them so never built my holding above the original buy 11 years ago. I'm a long term REIT investor so should still be well above water even if the waves get bigger. I'm over weight property at nearly 15% of portfolio because I'm not immune from the national property obsession but don't have the direct ownership landlord temperament and like to diversify. REITs have treated me well over time and I like their tax efficiency.

by Mark Hubbard 1965 | 20th Apr 20, 10:30pm 1587378659

Interesting Middleman. I've said on here somewhere I a was just cash, term deposits bonds and treasuries for over two years, as at stage of life where these sharemarkets were way way too much risk for reward, and wouldn't have time to recover from the needed correction (and that's coming all right; none of this crisis is priced in), but about seven months ago got desperate when term deposit rates went sub 3% so put 13% of savings in the unlisted Oyster Direct Property fund. I went unlisted because at that stage the NZX REITs had done over 25% returns for a year with so many others desperate for yield (and they'd pressed REITs yield down toward 3%) and I thought in a correction they blow that off in days, which they did end of Feb and they've not really recovered. So I got that bit right - and you have liquidity I don't - but I never brought pandemic into the equation :) So, not fatal, but mad with myself, I knew better, but I like the Oyster fund: good buildings, well managed, so will stick it out. It's 44% industrial, 30% office with good tenants, thus hoping not too much valuation damage coming; we'll see. Although nothing improves until at least level 2.

by Te Kooti | 20th Apr 20, 7:30pm 1587367838

Good comment mm, factual and insightful.

by middleman1 | 20th Apr 20, 9:03pm 1587373429

Thanks TK. This great little site has excellent contributions from knowledgeable property and economics people but not a lot of chat about investments in equities. Not surprising I suppose given under 20% of kiwis direct invest.

by Davo36 | 20th Apr 20, 1:46pm 1587347193

Rents are usually ratcheted, i.e they don't go downwards, either from the commencement date, or from the last review, depending on exact clause wording.

And even if that wasn't the case, for rents to go down, you'd need a negative CPI. Which we probably won't have.

by Averageman | 20th Apr 20, 3:28pm 1587353316

Yep Ratchet (one way only in favor of owner) is normal.

by Ocelot | 20th Apr 20, 3:43pm 1587354201

I don't think these are normal times though. If the debt bubble pops interest rates will go up regardless of what the OCR is.

by THE MAN 2 | 20th Apr 20, 9:03pm 1587373383

Term is for another 8 years or so then renewals.
Rent is more than reasonable for them so not a problem.
The tenants are not going anywhere!

by firsthomecryer | 20th Apr 20, 3:40pm 1587354059

by Houseworks | 20th Apr 20, 7:42pm 1587368562

KPG share price steady today at 1.01 and underpinned there. New rents to come onstream in august at sylvia park.
Good prospects at drury where they own over 50ha bought 2018
Govt investing in Kiwi Property's Drury development
https://www.newsroom.co.nz/2020/03/06/1070947/govt-investing-in-kiwi-pr…

by middleman1 | 20th Apr 20, 9:08pm 1587373720

Hmm. Possibly 'good prospects' in developing a mixed residential/retail village in early march but I speculate that perspective may have undergone 'robust' reconsideration in recent times.

by Houseworks | 20th Apr 20, 9:49pm 1587376196

Cheers MM. Certainly if residential property values drop significantly they would put drury on ice I suspect. Having the govt backing and input is a bonus though. I note you say above you have reservations of the coy, there is upcoming earnings growth through the Galleria due to open in August and the ANZ tower completion at sylvia park