Bulking up brings bigger returns

By ANNE GIBSON

Bulk retail beats offices and factories in the big-time real estate scene, outperforming all other sectors in terms of returns for the amount invested.

That is the conclusion of the Property Council's investment performance index, which measures returns in the property business by monitoring a basket of 317 properties valued at more than $3 billion.

Bulk retail returned 5.34 per cent in six months to the end of September - an income-stream return of 4.87 per cent and a capital return of 0.46 per cent.

Bulk retail centres have become the property to buy, a blue chip glamour stock yielding returns well above many other forms of investment.

The centres are popular with shoppers and tenants, generate a solid income from rents and cost less than an office building to put up in the first place.

They are so popular - and the amount of money they generate is so legendary - that smaller investors are being elbowed aside by big-time players such as Australian financial services giant AMP, which paid $40 million at the end of 2000 for the Manukau Supa Centa and owns other bulk retail centres, including the $185 million Botany Town Centre, part of which is a traditional-style mall shopping centre as well.

These properties are owned by AMP and its investors in its unlisted AMP Property Fund, which makes about 7.5 per cent a year.

How can smaller investors get a slice of the action?

Even a single store in a large bulk retail centre like those at Manukau or Albany costs well over $1 million to buy.

Alan McMahon, professional services director at Colliers Jardine in Auckland, says the sector is mainly for big-time investors, but active property syndicators often provide vehicles which allow investors with as little as $10,000 or $25,000 to buy into bulk retail centres.

Two Wellington-based syndicators - St Laurence and Waltus - regularly make property syndication offers, as does Auckland's Dominion Funds, which is part of Doug Somers-Edgar's Money Managers empire, with a head office at Albany.

Family trusts often buy into bulk retail centres, as do groups of investors banding together.

What is bulk retail property?

Peter Churchill, head of retail property for AMP, describes large format or bulk retail as a collection of shops operating in the same location which provide value for money in a low-cost environment.

What is syndication?

One of the active property syndicators - Wellington's Waltus Investments - explains this form of investment: "Waltus seeks out suitable properties with top-quality locations, tenants and leases.

"Waltus then contracts to buy the property on behalf of future investors, forms an investment entity - partnership or a company syndicate - and issues a prospectus and investment statement. Investors obtain a share of the property through the syndicate.

"Waltus contracts to manage the property and the syndicate for the investors. A regular income is paid out to the investors."

(Waltus, it should be noted, was heavily criticised by many investors when, in September 2000, it rolled nearly 30 separate syndicates into one company.)

What opportunities have there been lately?

Very few. One of the only syndicated offers for a bulk retail centre lately came from St Laurence for The Warehouse building in the Harvey Norman bulk retail centre at Mt Wellington in a prospectus launched last October.

Investors were promised 10.1 per cent cash return annually on a minimum $25,000.

Colliers agent Ash Hira, a retail specialist, says syndication offers like this - a building leased for 10 years to a leading retailer - are relatively rare but provide a secure way into the sector for smaller investors seeking a reliable return.

You can buy into Botany Town Centre through one of the AMP investment vehicles, but it contains other properties as well.

What sort of risks are there?

Property syndicators issue a prospectus to investors. They must abide by the Securities Act 1978 and outline risks involved, as well as saying what sort of investment is being offered, what return is projected and what terms and conditions apply.

The risks have become apparent to investors who bought into the many syndications that have failed lately.

McMahon points out that as well as those risks, people sometimes find it hard to get their money out fast.

Buying into property generally means the money is tied up long-term because the asset is notoriously illiquid. So if you think you might need money fast, this is the wrong place to put it.

Syndication as a form of property investment has not been all rosy, with the high-profile failure of three syndications - Pacific Properties (Metropolis), which still owes investors in an Auckland apartment tower $21 million plus interest; Park Terrace apartment bond issue, which raised $7 million for a Christchurch apartment development; and the $8 million Ballantyne bond for a residential and golf course development at Katikati, near Tauranga.

Although they were not specifically related to bulk retail investments, they illustrate risks associated with this form of property investment.

McMahon also points out that the devaluation of properties could result in investors getting less money out than they put in. And he warns that selling units in a syndication can be difficult.

"That's why people often prefer to put their money in the bank and only get 3 per cent, rather than a syndication offer which could return more than 10 per cent. The risks are higher."

Waltus - fearing falling values in many standalone syndications - rolled them into one much larger vehicle, drawing an outcry from investors who criticised the move.

What type of properties are available?

Colliers' Ash Hira cites the Harvey Norman bulk retail centre at Mt Wellington as just one example of the many ways investors buy into this form of property.

Because the entire centre was strata titled to begin with, it allowed the breakup of ownership of the buildings once construction ended.

Some of the properties in this development were syndicated for smaller investors, such as The Warehouse with the St Laurence offer, some were bought by retailers operating from the premises, such as Harvey Norman.

Some - such as the Hannah's building - went to family trusts, which put in more than $1 million to buy a building.

At the other end of the scale is a larger and more established bulk centre like the 24,000sq m Albany Mega Centre, valued at $48 million, with a Warehouse, Farmers, Bond & Bond, Rebel Sports, Noel Leeming and many other large-format bulk retail stores, complete with mega-carpark.

This was one of the first bulk retail centres in New Zealand and is viewed as a good example, envied for its excellent returns and climbing rents.

A Waltus vehicle, Albany Power Centre Properties, was the syndicate formed in July 1997 to allow investors to buy in. Its present return on a $5000 investment is an attractive 11.75 per cent.

What succeeds in bulk retail?

Peter Churchill of AMP says one critical success factor in a bulk retail centre is accessibility.

"The centres need to be located on major road networks. Carparking is another vital factor because consumers are reliant on private vehicles.

"Carparking is essential. A typical shopping centre would require six parks per 100sq m of retail space. Large format requires about four carparks for the same area," Mr Churchill said.

"Critical mass is also vital for the success of bulk retail - 15 or more retailers are required, so most of the needs of the consumers can be met from the one trip.

"Comparison shopping is important. For example, customers will want to look at more than one electrical store for an item, so having stores like Farmers, Noel Leeming and Bond & Bond in the same location is important.

"The frills found at other types of shopping centres, such as marketing and entertainment, are not seen as being required, therefore the management requirement is minimal so long as the property is clean and safe."

Waltus

St Laurence

Amp

Colliers