Office demand a ‘positive surprise’ for Precinct Properties

Friday, 15 November 2024

Precinct Properties’ net operating income before tax inched up 1.5% over the last year - a “pleasing” outcome given the economic environment, the company’s chief executive says.

The NZX-listed commercial property company’s funds from operations from its directly owned assets increased 2.9%, shareholders at its annual general meeting on Friday were told.

But after adjusting for transactions and development, investment property funds from operations were up 5.2%.

Precinct Properties chief executive Scott Pritchard said strong rental growth in the Auckland office portfolio underpinned the uplift.

There was net property income of $139.3 million in the 2024 financial year, and that led to the 1.5% annual increase in net operating income before tax to $103.6m, he said.

“Acknowledging the economic environment that we’re operating in, demand has continued to positively surprise us.”

The company’s core portfolio continued to perform well, with occupancy remaining at 98% and an average lease term of 6.6 years, he said.

“Our portfolio is well-positioned with under-renting of 11% and expected annual rent review growth in the 2025 year of 3.7% for 80% of the portfolio, which gives us confidence over the medium term.”

Precinct’s directly owned portfolio was valued at $3.3 billion at the end of June, while its capital partnerships totalled $1.6 billion on completion value.

Pritchard said its capital partnering strategy continued to leverage its platform, market position, and people to create investment performance for its partners and generate higher returns on its equity.

“We continue to see strong demand, particularly for residential and living sectors, and expect these to be a key growth area supported by strong market fundamentals and investor interest.”

He expected the value of its capital partnerships to grow to be in the range of $4 to $5b over the medium term.

The company had made good progress on both its commercial office and residential developments, he said.

In the office space, it had completed the Deloitte Centre in Auckland and Bowen House in Wellington, while construction on Wynyard Quarter stage three in Auckland and 61 Molesworth St in Wellington was due to be completed next year.

Controversy has surrounded the Downtown car park development in Auckland, but Pritchard said negotiations had concluded, the agreement had become fully unconditional, and the resource consent had been lodged.

The company expected to start construction on the first stage of the project in 2026, and had entered into exclusive negotiations with an occupier for about 40% of the available office space, he said.

“This demonstrates the demand from businesses wanting to be located in high quality office space located on the waterfront.”

Meanwhile, the company’s residential pipeline in Auckland was also advancing, he said.

Works on one of its apartment developments, The Onehunga Mall Club, had concluded, and stage two of another apartment block, Fabric, also in Onehunga, was under way and due to finish in 2026.

Its Parnell luxury apartment development, York House, was expected to be completed in 2027, and it had conditionally acquired a 5250m² site in Mt Eden for a 135-apartment development.

Pritchard said it recently partnered with Orams Group to jointly develop their waterfront site on the western edge of Wynyard Quarter.

It believed the site was one of the best residential development sites in Auckland, and it would have a 50% interest in the residential site and had been appointed as development manager, he said.

“We are also pleased to announce, today, we have recently acquired a 2300m² site at 99 College Hill Rd in Auckland.

“This acquisition grows our residential development pipeline, is highly consistent with Precinct’s living strategy, and positions us to deliver premium quality build-to-sell apartments in a desirable location.”

Significant progress on the company's move into student accommodation with a planned 600-bed purpose built facility on Auckland’s Queen St had also been made, he said.

“We are now in exclusive negotiations with our preferred capital partner. With limited new supply in this sector and strong demand growth anticipated, we believe this sector is well positioned to deliver strong investment returns.”

Precinct’s growth pipeline totalled about $3b across office and residential sectors, leaving it well-positioned to take advantage of these long-term strategic opportunities, he said.

“Demand from capital partners remains high, particularly those looking for exposure to the living sector, which further solidifies our confidence in the future.

“Looking ahead, we believe that economic conditions will be supportive over the next four to five years, allowing us to further advance our growth strategy.”