Precinct faces Wellington leasing challenge

Failure to secure a government contract for office space presents listed Precinct Properties with a looming leasing challenge.

Formerly known as AMP NZ Property Trust, the company unsuccessfully submitted a leasing proposal involving its recently acquired Bowen Campus in Wellington to the government’s Property Management Centre of Expertise in August.

The government’s property arm had asked for proposals for the supply of up to 60,000sq m of space.

Bowen Campus is about 92% leased to the Ministry of Social Development, but the lease runs out in March 2015, which may leave Precinct holding an ageing building with few leasing prospects.

The Bowen Campus acquisition earlier this year came against a well-tabulated shrinking of the state sector under government policy.

The failure of the tender also raises questions about the Bowen transaction.

Bowen Campus near the Beehive was acquired from unlisted AMP Capital, an investment vehicle in the AMP group, with its own governance. It has been quitting some of its Wellington properties to reduce debt and repay capital to investors.

The difficulty that Precinct finds itself in may reinforce the view that the boards are quite separate. However, AMP Capital has a 50% stake in the external management company.

Bowen was acquired for $50.4 million on a soft yield of 10.7% (compared to the prevailing 8%) on the understanding the building requires investment to upgrade it for tenants when, or if, it loses its state tenant in 2015.

At the time of the acquisition, Precinct chief executive Scott Pritchard said the price represented a relatively low land and building buy-in rate of $1400/sq m.

Situated next to the Beehive and Parliament Buildings and encompassing 1ha, the property has 30,000sq m of net lettable space and an existing resource consent for a total of 60,000sq m of office space, providing for potential future redevelopment.

Mr Pritchard said earlier this year that the acquisition would provide “an opportunity to invest in a strategic asset while maintaining an acceptable level of risk, with three years' secure cashflow”.

After the acquisition, AMP NZ Office’s weighting to Wellington increased by 2% to 52%. The purchase was funded through bank debt and gearing increased from 22% to 25%.