Market conditions limit growth for KIPT

Kiwi Income chief executive Chris Gudgeon. Photo / Brett Phibbs

Market conditions are constraining prospects for rental growth in Kiwi Income Property Trust's retail portfolio, chief executive Chris Gudgeon told its annual meeting.

But the outlook would improve as the economy moved out of recession.

In the office sector, weak demand and increasing vacancy rates were expected to put downward pressure on market rental rates for the next two years or so.

Despite the challenging environment, underlying operating earnings remained solid, Mr Gudgeon said.

The trust benefited from the strength of its diversified property portfolio, high occupancy levels now at 98.7 per cent, sector diversification in both retail and office properties and a diverse and high-quality tenant base.

"We are in a strong financial position, with conservative gearing and with committed and enduring debt facilities in place."

Subject to economic conditions, the trust continued to project a cash distribution for the year to the end of March 2010 of about 7.5c per unit, he said.

In the most recent 12 months the full year cash distribution was 8cpu.

Mr Gudgeon said that since 2002, the Auckland and Wellington CBD office markets had performed well for investors.

Solid demand and controlled new supply led to low vacancy rates and significant growth in rents, with vacancy rates reaching historic lows in both CBDs in 2008.

The impact of recession would be felt in both office markets during the next two years, Mr Gudgeon said.

Research analysts forecast that market rents may decline between 5 per cent and 15 per cent, with vacancy rates expected to climb as new office towers were completed and backfill space came to market.

Investment sales had slowed dramatically in both markets during the past year, with investment activity now largely driven by syndicates, family trusts and wealthy people.

Putting developments in context, the New Zealand listed property sector as a whole was one of the best performing globally in the March year, with a total return of -20 per cent.

That compared with Australian and US-listed property sectors which showed total returns just under -60 per cent, and Britain at -73 per cent.

He thought the reason this country had fared comparatively well was because trusts such as Kiwi Income had retained a traditional and conservative approach to property investment with conservative gearing, limited development exposures, and a focus on local markets.

In the year to the end of March, the trust's distributable profit slipped 1.8 per cent to $61 million.

The trust's property portfolio recorded a net reduction in the value of its property portfolio of $215.1m, equivalent to 10.1 per cent of the portfolio value, while the fair value of interest rate derivatives fell $54.1m.

After allowing for those non-cash reductions in asset carrying values, the trust delivered an overall net loss after income tax of $168.9m.

- NZPA