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Trusts turn to development

NZ Herald — Prime Assets
Saturday August 04, 2007
By Colin Taylor

Dwindling premium buying opportunities in a commercial market that has local and offshore institutions vigorously competing for quality properties is driving new strategies for Trust Investments.

Trust Investments manages a $400 million property portfolio for Anglican Church charitable trusts, as well as tax-exempt charities, and intends doubling the size of the business over the next three to five years.

It is looking outside its normal sphere of operation and has formed its first joint funding venture. TIML Property Fund has partnered with The St Johns College Trust Board to provide the money for a new $9.8 million office building at Pumpkin Patch's headquarters in East Tamaki.

Head office staff of the NZX-listed Pumpkin Patch working in the existing East Tamaki Rd distribution centre are running out of room. Next year they will move into a 2000 sq m, two-level office building and 500 sq m reception area that links both buildings. The basement has room for 38 car parks and there are another 128 parks on an adjacent site.

Trust Investments' general manager property, Garry Anderson, says Pumpkin Patch had considered moving to an alternative site. But by forming a joint venture to cover the funding for the building, Pumpkin Patch has signed a new lease for the property that incorporates the development designed and managed by the company's property team.

It is the first time TIML Property Fund has put up the money for a development and it has avoided being exposed to the development risks with the development contract being between Pumpkin Patch and the construction company.

"The development is being run by project control groups involving all parties and input from Trust Investments ensures agreed construction standards are met," Anderson says.

"The joint venture gains a rental increase and a lift in the property's capital value on completion, making what was a good quality property into an excellent long-term stable investment.

"The significant value we are adding to this property underpins the value of the existing distribution centre."

The development also gives the fund exposure to the office market. Twelve freehold industrial and retail properties spread throughout New Zealand and valued at $79.5 million sit in the fund, which has grown from a 2001 base of $20 million. The fund is available to any New Zealand tax-exempt charity.

About 50 per cent of the properties are in Auckland and no single property can be more than 25 per cent of the portfolio's total value. The 12 properties provide a stable cash flow for TIML Property Fund's tax-exempt charities.

The funds exposure has, until now, been to industrial and retail properties as they tend to fit its investment objectives that centre on preservation of capital and stable income flows, despite the office market turning in a top investment performance in the past three to five years.

"We see the office sector as a riskier asset class compared to retail and industrial properties that tend to be generic and less prone to obsolescence. They can be repositioned more easily in the market if a tenant fails," Anderson says.

Office property also requires more investment upfront and the fund has not had the appetite for the high capital costs required, in light of its strict adherence to no individual property making up more than a quarter of the fund's value.

However, that is changing.

The fund is open to buying office property in joint venture arrangements with tax-exempt charities and trusts, provided the buildings meet Trust Investments' stringent investment criteria of location, international or strong national brands as single tenants, long term leases, building quality and design, and properties that measure up to valuation.

"To maintain quality and reduce risk for the portfolio, Trust Investments has a rigorous due diligence process tailored to each property and its characteristics. Apart from the quality of the building, its condition, use profile, legal due diligence and investigation into the tenants' business and financial status, we are totally guided by a property's valuation and are happy to buy if it has long-term growth and capital gains," says Anderson.

Trust Investments is entirely focused on the needs of charities and their requirements for stable income flow, low management costs and preservation of capital.

"We are more risk-averse than the average investor and have hard and fast rules. The most important considerations are providing stable income flows and protecting the capital of our clients. The advantage for our clients is that we only deal with tax-exempt charities that are like-minded. They are conservative and invest for the long-term."

The similar nature of Trust Investments' commercial property investments has been consistent from the time the Anglican Church Trusts Boards decided it was no longer satisfactory to sit back and let assets merely tick along. Most of the trust's portfolios carried a significant number of poorly performing property investments.

Since Trusts Investments was established six years ago to lift the performance and professional management of tax-exempt charities and charitable trusts, the new approach has stabilised the capital bases of the religious, education and general philanthropic clients and income flows from existing and new property investments have been steady.

"There haven't been the peaks and troughs that many investors experience because of our objective investment criteria and quality of property and tenants," says Anderson.

"We are active portfolio mangers and carry out a rigorous annual review of every property looking not only at opportunities to add value and achieve rental growth through the term of ownership, but to ensure they continue complying with agreed investment criteria. Properties that are under-performing or don't come up to scratch are sold."

Trust Investments plans to build an $800 million to $1 billion property portfolio by the end of the decade and this will give it access to asset classes it has shied away from or been shut out of because of spiralling prices.

Anderson says joint ventures will help Trust Investments compete against the growing number of Australian and European funds targeting New Zealand property.

Compressing yields in the past couple of years has made it difficult for Trust Investments to source property that meets its investment criteria and fits within the size of its portfolio.

"We are in a price bracket where we are competing against institutions. Below that the competition comes from syndicates and local investors who are prepared to pay more than our valuation often shows a property is worth or where we feel future growth is limited."

Anderson says one of the benefits of joint ventures is the bigger exposure that tax-exempt charities and charitable trusts achieve in relation to commercial property in other New Zealand areas and in sectors they could not have afforded on their own.