In late 2011 CapitalGroup became aware that a distressed Australian investment fund was struggling to sell its last remaining NZ real estate asset. After visiting the building it became apparent why this building had been difficult to sell. Firstly, it is on leasehold land and sits in the Quay Park business district on land owned by the Ngati Whatua O Orakei Maori Trust Board. At the time the property was being marketed, the ground lease was up for renewal creating significant uncertainty for a new buyer. Secondly, the building had approximately 20% vacancy.
On the positive side, the building is very high spec, well constructed, and has a good fringe CBD location. Further, the building had an excellent mix of international and local tenants.
CapitalGroup decided that providing the building could be acquired at a deep discount to its inherent underlying value, and given some active management and time, it could be repositioned and its value enhanced.
In this regard CapitalGroup partnered the acquisition with Wade Allen of Murchison Group. Mr Allen is a leading commercial leasing expert and his colleagues at Murchison are prominent commercial property managers and consultants.
Rather than approach the vendor with an aggressive conditional price, CapitalGroup and Mr Allen decided to complete due diligence prior to making an unconditional offer. Once the due diligence process was completed which included a detailed investment analysis, we made an unconditional short term settlement offer on the premise that the Australian fund would be prepared to only accept a heavily discounted price on those terms. This proved to be the case and the property was settled mid December 2011.
It is CapitalGroup's view that during difficult periods in the property cycle leasehold property generally gets "over sold" and we believe that this is the case here. At the time of acquisition the general view from our advisors was that the commercial leasing market was slowly recovering after four years of negative growth. At the acquisition price the building was strongly cash flow positive and was able to support the proposed financing structure. Finally the partnership with Mr Allen provided the necessary expertise to complete the leasing of the building and thus assist in repositioning it from a value perspective.