Active management in action: 2 Kitchener Street

With economic uncertainty making an effective re-leasing strategy crucial, 2 Kitchener Street demonstrated Oyster’s active management strategy in action.

Investment highlights

• Sold in 2018 after 10.75 years, delivering a total return of 109.7 per cent for investors
• Annual income returns of 5.6 per cent
• Annual total return of 10.2 per cent

A lot to like

With its CBD location, robust lease profile and attractive purchase price, 2 Kitchener Street aligned with Oyster’s strategy to acquire quality assets in sought-after locations with strong future value potential. It was purchased in 2007 for $12,880,000.

In prime position at the bottom of Kitchener Street in the Auckland CBD, the property offered on-site carparks, easy access to motorways and public transport options and views overlooking Albert Park.

Its floor plate was ideal for small to medium sized businesses and a major tenant occupied approximately 45% of the building at the time of purchase.

“It was a quality CBD office proposition with a lot going on – we saw potential to deliver strong investor outcomes through both rental growth and capital gains,” Oyster General Manager – Investment, Steven Harris said.

Re-leasing strategy realised

The following year, the Global Financial Crisis (GFC) struck, felling the property’s majority tenant, and leaving the asset only 55% occupied.

An aggressive and urgent re-leasing strategy was required to protect investor outcomes, and this, in part, was supported by the fund having been structured with zero debt.

“Oyster structures its funds in a number of ways, depending on the asset, relevant economic conditions and the outcomes we are targeting,” Harris said. “Conditions at the time of purchase meant a 100% equity fund structure was appropriate.”

Due to this strong equity position, Oyster was able to access borrowings to enable capital works to support the re-leasing strategy, despite the mounting pressures of the GFC making loans unfeasible for many.

A lobby refurbishment, bathroom facility upgrades and base build work to accommodate the needs of various new tenants saw the asset well positioned to attract quality long term leases.

All leasing agents were engaged and despite ongoing economic upheaval, the strategic re-leasing campaign delivered and, within four and a half years, 2 Kitchener Street was returned to 100% occupancy.

“Successfully deploying a strategic re-leasing campaign in an uncertain economic environment was no mean feat and is a testament to the team’s expertise in active risk and opportunity management,” said Harris.

An opportunity to materialise value

With the building being more than 30 years old, the asset was at a point in its lifecycle where capital expenditure would be required to support key plant and equipment upgrades.

Additionally, the lease expiry profile would require a proactive retention strategy in the medium term to ensure 100% occupancy and WALT was maintained.

Both exercises would incur costs to investors, and this needed to be weighed up with a view to delivering optimal investment outcomes.

Having weathered the storm of the GFC and maximised the asset’s rental potential, the timing was right for Oyster to materialise the value of 2 Kitchener Street for its investors through divestment.

An off-market process was run with CBRE and coupled with two strong unsolicited offers, Oyster presented a compelling sale strategy to investors.

The asset was sold in 2018 for 22,050,000. Across the 10.75-year life cycle of the fund, investors received a total return of 109.7 per cent, including an annual income return of 5.6 per cent.