Maximising returns through the timely divestment of Countdown Papakura

Recognition of a strong performance across a range of property investment fundamentals played into Oyster’s decision to invest in this well-positioned supermarket. Understanding that the local retail landscape was changing, and that the tenant’s long-term plans were uncertain drove the decision to realise returns on the well-timed investment.

Investment highlights

• Sold in 2016 after almost five years, delivering a total return of 51.8 per cent to investors
• Annual capital return of 2.5 per cent
• Annual income return of 7.9 per cent
• Annual total return of 10.4 per cent

In 2011, when Oyster added a supermarket in Papakura to its property portfolio, the asset met several key property investment fundamentals.

With a favourable location in a strong catchment area, ample parking and multiple road entrances, the supermarket possessed key attributes that appealed to Oyster. The lease structure, supported by a prominent nationwide supermarket tenant, further enhanced its appeal with three-yearly market reviews.

Having proven itself as a strong performing sector with rental growth during previous years, the decision to invest was made.

“We were pleased to add this asset to our portfolio,” stated General Manager – Investment Steven Harris. “Our decision to acquire the property was quickly validated, as this supermarket delivered impressive results for investors, achieving an annual income return of 7.9 per cent during the time it was under our ownership.”

Changing conditions kept the team on its toes

During its ownership period the conditions in the property market surrounding the Papakura supermarket evolved.

Multiple additional supermarkets moved into the area in the five years prior to sale: both a competitor and an additional outlet of the same brand in the neighbouring suburb of Takanini.

At the same time, a key large store retailer moved from the Papakura town centre to a new premise in Takanini, leading to an increased number of commercial tenancy vacancies and subdued foot traffic on Papakura’s main retail strip.

“We always keep an eye on market trends and review key investment factors at macro and micro levels – in this case, this meant regular assessments of changing circumstances on, and close to, the asset’s street,” Harris said. “Our assessments are a crucial factor when considering what the best next step is for an asset.”

We also needed to consider a near-term lease expiry and the risk that it could mean for our investors.

“The lease was due for renewal in around five years’ time (August 2020). There was some risk that the tenant might not exercise its first rights of renewal due to the market conditions we were noticing,” Harris said.

“We understand a key motivator and benefit for our investors are distributions, and our sense as to whether a tenant will renew their lease or move on is a critical factor in our decision-making due to the long-term impacts on investor returns.”

A divestment: the best next step

It became clear that a divestment strategy would enable Oyster to capitalise on the remaining lease term and crystallise growth for its investors.

The team’s assessment of the situation was proven correct when the tenant did not take up its first right of refusal to purchase the property.

“In some ways, that reinforced the uncertainty about the tenant’s long-term intentions,” Harris said.

The asset sold in 2016 for $850,000 above its valuation.