Precinct Properties earns Morningstar upgrade on ANZ Centre deal

Scott Pritchard, CEO Precinct Properties. Photo / File

Shares of Precinct Properties New Zealand earned an upgrade from Morningstar following the commercial property investor's deal, announced last week, to sell 50 per cent of the ANZ Centre in Auckland's central business district for $181 million.

Morningstar "slightly increased" rental growth expectations on upcoming lease renewals while it raised its fair value estimate for the stock by 4 per cent to $1.37, up from $1.33 previously, analyst Tony Sherlock said in a July 5 note. The company's agreement on the ANZ Centre is a 12 per cent premium to the last valuation in June 2017, Sherlock noted.

Shares of Precinct rose 1.1 per cent to close at $1.36 on Thursday. The stock has gained 15.1 per cent in the year, compared with an 18.8 percent return for the country's S&P/NZX 50 Index.

"Office vacancy rates continue to fall in Auckland," Sherlock noted. The prime-grade CBD office vacancy rate is 4.3 per cent "and trending down, leaving few options for tenants and putting upwards pressure on rents in the near term."

"The very low vacancy rate in the Auckland CBD market will benefit Precinct for an extended period as Precinct is both delivering and controlling the timing of much of the upcoming new supply," according to Sherlock.

He pointed to the company's new premium grade office at Commercial Bay, for which construction is set to complete in the second half of 2019, as the major new addition to Auckland's office stock.

While Precinct has garnered commitments for 66 percent of the building, leaving some residual risk, Sherlock said he is confident the building's office component of the development "will be close to 100 percent committed" on completion.

"We see low risk of new competing supply mainly due to a spike in construction costs since Precinct commenced its major development at Commercial Bay," Sherlock said.

"By extension, we forecast Precinct will lock in high rent of medium to long durations, with a low probability of oversupply putting downward pressure on rents in the medium term."