Long NZ government lease underpins new office syndication

3 February 2020   /   5 min read

A new long-term lease of 15 years to a New Zealand government tenant underpins a new commercial property investment opportunity that allows investors to acquire an interest in a CBD office tower at the heart of Wellington’s parliamentary precinct.

Pastoral House is an exceptionally located 18-level commercial building, situated at 25 The Terrace / 92 Lambton Quay in Wellington, that has recently been seismically strengthened and is currently undergoing extensive refurbishment.

The Ministry of Business, Innovation and Employment (MBIE) will occupy all 15 upgraded office floors from completion of the refurbishment, which is expected this month.

Property Funds Manager, Oyster, is offering investors the opportunity to acquire an interest in the property through the Pastoral House Proportionate Ownership Scheme.

Investors are expected to receive annual pre-tax cash distributions of 6 per cent, to be paid monthly, forecast for the year ending 31 March 2022. The minimum investment is $50,000 and additional investment can be made in multiples of $50,000. 

Interests in the scheme are being marketed by Oyster to investors in conjunction with Colliers International’s specialist Syndications team.

Charlie Oscroft, Syndications Director at Colliers, says it is an exciting opportunity to invest in a significant asset backed by the security of a government tenant.

“Pastoral House provides excellent property investment fundamentals capable of attracting quality occupiers well into the future.”

“It is in a prime location only 250m from the Beehive, with street frontage and access to both Lambton Quay and The Terrace – considered among the best office locations in the capital.”

“The building has recently been seismically upgraded, and the office floors, lobby and amenities are in the process of being substantially refurbished.”

“MBIE’s office leases, which account for 90 per cent of the property’s income and 92 per cent of its lettable area, will return almost $5.71 million in annual rent.”

“These leases benefit from built-in income growth, with fixed annual rental increases of 1.5 per cent complemented by market rental reviews every six years.”

“This dependable income growth, backed by a reliable government tenant, provides excellent covenant well into the future.”

Schiele says 55% of investors originated from Auckland, with Bay of Plenty and Waikato investors combined providing a further 25% of the equity. Rich Lyons, Capital Sourcing Manager of Oyster, says Pastoral House is well-positioned to benefit from the capital’s competitive office market conditions.

“Wellington’s office sector boasts a very strong outlook underpinned by low vacancy rates and ongoing supply constraints. Tenant demand for the limited amount of available quality office space is high, and rental rates are forecast to increase further as a result of this demand. We believe Pastoral House will appeal to new and existing Oyster investors seeking exposure to the commercial property sector and the monthly distributions that an investment of this type can offer.”

Chris Dibble, Research and Communications Director at Colliers, says office vacancy rates in Wellington are at their lowest in almost a decade.

“The latest Colliers’ occupier survey found the prime vacancy rate is at a very low 0.4 per cent, with only 1,100sq m of space available for lease, while the secondary vacancy rate is at 7.3 per cent.

“These tight leasing conditions have prompted owners to develop new premises or refurbish and seismically strengthen existing stock. While more than 74,800sq m of new office space is expected in the next few years, this is only likely to help alleviate some of the current acute space shortages. A continuation of solid market conditions is signalled by recent announcements from the public and private sector to pre-commit to future available space.”

Dibble says Wellington office rents have increased strongly over the past year.

“The delivery of new premium-grade buildings in the next five years will likely see rents at significantly higher rates, which will help lift all average rents further over the next few years.”

Dibble says strong market fundamentals and low interest rates have created positive investment conditions.

“Given the positive prospects for the sector, buoyant occupier and investment conditions for the Wellington CBD office sector are set to continue.”

Pastoral House is situated on a single freehold title at 25 The Terrace and 92 Lambton Quay, at the centre of the ‘Golden Mile’ of Wellington’s CBD.

The locale boasts numerous government and corporate office tenants, as well as many notable national and local retailers.

Pastoral House has a net lettable area of 15,960sq m comprising four retail tenancies fronting Lambton Quay, two levels of podium office accommodation, a podium car park with 23 spaces, and 15 levels of office tower accommodation above.

The property is expected to have a weighted average lease term of 14.04 years as at 30 April 2020. Retail tenants include convenience food retailer Wishbone, Concorde Cafe, and branches of Kiwibank and BNZ.

MBIE’s lease is expected to expire in February 2035, if the lease commences on schedule in February 2020. The ministry has three further rights of renewal of six years each.

Pastoral House was constructed in the late 1970s, has been maintained to a high-quality standard and has been continually upgraded since construction. The last major refurbishment took place during 2004 to 2005. The current refurbishment works include new HVAC services, lift upgrades, works to the lobby, refurbishment and upgrade of core services and amenities in the office floors, and the installation of new access and security control systems.

The recent seismic upgrades have brought the building to a seismic rating of 80 per cent of NBS to meet the tenant’s requirements.

Oyster will purchase the property for $77 million and will manage and administer the scheme on behalf of investors, as well as managing the property. A bank loan from Kiwibank and underwrites ensures the transaction should settle once conditional equity requirements are met.

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