‘Like dragging a bulldozer’: Tough times in commercial property leasing, says Argosy

Wednesday, 21 May 2025

Leasing commercial properties over the last year has been like “trying to drag a bulldozer”, Argosy Property’s chief executive says.

But the NZX-listed commercial property company still managed to turn in a solid performance over the year to the end of March, with post-tax profit and income up.

Its after-tax profit was $125.9 million, a significant turnaround from a $54.5m loss in the year to March 2024, and its net property rental income inched up 0.4% to $11.6.9m from $116.5m.

Net distributable income remained unchanged at $55.8m, but a $2.8m tax expense was incurred due to the Government’s removal of deductions on the depreciation of commercial buildings.

The company also reported its portfolio had a revaluation gain of $72.7m over the year, primarily driven by market rental growth, compared with a revaluation loss of $111.7m the previous year.

It had successful leasing and rent review outcomes, including 3.5% annualised rental growth on rents reviewed and an 86% tenant retention rate, it said.

Argosy Property chief executive Peter Mence said the year was influenced by tight economic conditions, high interest rates and geopolitical uncertainty, and the company had worked hard to deliver solid core operating metrics including occupancy, rental growth and leasing outcomes.

“We are pleased with the efforts of the team this year. We have managed to retain many valued tenants and also attract new tenants to the portfolio.”

But in a presentation to investors he said the leasing environment has been challenging, and like “trying to drag a bulldozer”, and he expected it to continue to be tough in the year ahead.

They were getting good levels of inquiry for their properties, especially for green properties and in areas where there were lower than market value opportunities, he said.

“However, the enquiry period is lengthy and challenging as many tenants are still worried about economic uncertainty and where the market is going.

“The conversion time period to getting tenants over the line is higher than it has been for many years, especially with Government tenants.”

Tenants were looking for more flexibility and shorter lease times as a result of the uncertainty, and Argosy expected that to continue, he said.

The move towards shorter lease times was reflected in a reduction in the portfolio’s weighted average lease term to 5.1 years from 5.2 years last year.

Mence was not happy with that, but he said occupancy was solid at 96.5%, and a core focus over the next year would be to address residual vacancy and near-term expiries.

“The extended time to close leasing opportunities was evident in the first half of the year, but we have been buoyed by a recent improvement in leasing enquiry.”

He said the softer leasing environment was offset to some degree by the ongoing strong metrics for the industrial sector.

“This sector continues to show low forecast vacancy and positive rental growth and is forecast to deliver solid returns over the next four years.”

Argosy’s portfolio was 53% weighted to industrial at the end of March, and the company was working to increase towards its target weighting of 60 to 70% in the medium term.

There was also growing evidence around rental premiums between green and non-green buildings, Mence added.

“A recent CBRE sustainability report found that more than 50% of Prime and B-Grade office occupiers are willing to pay a premium to be in space with high environmental performance. Green ratings also have a high correlation with building quality and occupancy.”

Argosy has a pipeline of green value-added development industrial sites, including 224 Neilson St in Onehunga and 8-14 Mt Richmond Drive in Mt Wellington.

These developments were progressing well, and were continuing the portfolio’s transformation into a 50% green portfolio by 2031, the company reported.

Argosy chairman Jeff Morrison said the board was pleased by the progress made towards the sustainability goals evidenced by the green buildings completed, certifications achieved and the commencement of new developments.

“We believe greening our portfolio towards more sustainable buildings, with appropriate certifications validating their quality, will drive long term shareholder value.”

The business had performed well in the second half of the year, despite difficult market conditions, and the board was comfortable with the company's capital position and balance sheet strength, he said.

Argosy owns a $2b portfolio of industry, office and large format retail properties around the country. It includes flagship properties such as the Citibank office block in Customs Street, and the Albany Mega Centre, both in Auckland.