Analysts react to Kiwi Property's $442m build-to-rent plans

Who will manage the new build to rent apartments? What returns are expected from the first two schemes? Is a third likely? What's happening with Drury?

But no one asked about Ikea.

Analysts and a fund manager yesterday asked Kiwi Property chief executive Clive Mackenzie and chief financial officer, Gavin Parker, about $442 million plans for new build to rent apartments at Sylvia Park and LynnMall in Auckland.

Mackenzie spoke of longer-term plans for other BTR projects which are not beside Kiwi-owned malls.

Shane Solly, a portfolio manager of Harbour Asset Management, asked Mackenzie and Parker about opportunities in the next 10 years.

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Mackenzie said aside from Sylvia Park and LynnMall "we'd like to do stand-alone developments. I'm sure we'll get there. The Government has been keen to hear how we'll advance build to rent."

Solly asked about interest deductibility for new builds and Mackenzie said Kiwi was relatively confident that would be allowed.

Solly also asked whether Kiwi would be the business that would manage apartments in the first scheme at Sylvia Park. Mackenzie said that in the last two years, Kiwi had built up its residential team and it did indeed plan to manage that new scheme within the business, which would provide a longer-term opportunity.

Arie Dekker of Jarden asked about price escalation in the construction sector, given the risks of developing a scheme as large as the Sylvia Park plans when prices are rising so fast.

"We're still in the process of finalising our main construction contract. We're going to be locking in some of the trades and materials," Mackenzie reassured him.

Kiwi's plans for a 25-level block at LynnMall. Photo / Supplied

Asked about the land to the north of the main Sylvia Park site where the BTR scheme is planned and the value of that, Mackenzie refused to say exactly what the 7428sq m site in Mt Wellington was valued at. All he would say was that it was within overall Sylvia Park asset values.

Asked by Dekker about rents with amenities and whether Kiwi would achieve a premium for the area, Mackenzie said it wasn't possible to go into specific numbers yet because the forecast would be 2.5 years out.

"Yes, we are looking for a small premium in the low single digits to reflect the superior quality of accommodation and amenities on sites. We've looked at the international sites and they're leasing at reasonably substantial premiums to the market.

Asked about annual rental growth, Mackenzie said "around that 3 to 3.5 per cent is where we're seeing it at the moment."

Asked about the sales of the malls in Palmerston North and Christchurch to fund the Sylvia Park BTR scheme, Mackenzie said that the assets "will take some time to sell. We're reasonably advanced on the sale of the assets. Lockdown has had an effect. There's always a need for seismic assessments and they can take time. We're confident we've got a 2.5 year build time for BTR and we believe we have plenty of time to successfully complete those asset sales".

Kiwi is selling The Plaza and Northlands in deals yet to settle. It said yesterday funds from those sales would be used for the Sylvia Park apartment scheme.

Kiwi said: "The project will be debt-funded, pending the outcome of the process to sell The Plaza and Northlands which is currently under way."

Rohan Koreman-Smit of Forsyth Barr also asked about those mall sales.

Parker said no timing was given in guidance but there had been delays due to Covid "so that provides us with additional income in addition to what we'd assumed in our guidance".

Asked if the pink area outlined on a map showing where BTR would be was all the land Kiwi had in addition to its Sylvia Park site, Koreman-Smit was told "we'd prefer not to talk about that".

It was not mentioned on the conference call but some property insiders think Kiwi wants to bring New Zealand's first Ikea to Sylvia Park although neither Ikea or Kiwi has talked about it and that wasn't mentioned at the briefing. One property developer has told the Herald he has seen plans for an Ikea at Sylvia Park.

Mackenzie did tell the Herald that about five homes had been demolished on Lynton Rd beside Sylvia Park for the new BRT scheme. Kiwi had owned those residential properties for some time, he stressed.

However, there is intense interest in whether Kiwi is expanding its Sylvia Park holding to accommodate such a huge retail business as Ikea.

Property records show that what are residentially-used sites next to Sylvia Park are held by one business: Lynton Builders. It owns 21, 23, 25, 27, 29, 31, 33, 35 and 36 Lynton Rd as well as the adjoining 252 Mount Wellington Highway.

Mackenzie said in the briefing this morning that historically the Sylvia Park site had been seen as retail but BTR would change its nature. Compressions of capitalisation rates would be expected as this new type of development occurred, he said.

Jeremy Kincaid of UBS said BTR was not an established asset class and he wanted to know where cap rates sat globally for such assets.

Mackenzie said those were 4 to 4.5 per cent in Australia, "probably on the lower side. Internationally, below that." Mackenzie said also BRT would become an asset class in New Zealand, just as commercial and industrial were asset classes.

Kincaid also wanted an update on Kiwi's 51ha landholding at Drury where it plans a new town centre.

That has been in the news lately, with Auckland Council proposing a 660 per cent fee rise for developers there.

Mackenzie indicated confidence in plans for that scheme.

"Drury - we're still awaiting a response on our plan change application. We've also gone through the process with Auckland Council for a private plan change along with other developers. We've done traffic modelling. It's all tracking along. We would have hoped to hear back from the Government on our fast-track application but we haven't heard back on whether it's successful or not," Mackenzie said.

Oyster Capital, Fulton Hogan and Kiwi Property are seeking to rezone about 330ha of land in the Drury East area, in rural south Auckland, from future urban to a mix of residential, business and open space zones.