Manager's Overview

During the year we have seen the onset of the credit crunch throw international finance markets into a period of substantial challenge. This has resulted in a change in the business environment for New Zealand industry and subsequently, a change for the property sector.

There is a raft of commentary currently available offering varying opinions on the market and the current and likely future effects of finance market changes on New Zealand. What we do know is that the market has slowed since July 2007 and most commentators agree that it is unlikely to show any significant improvement until the end of 2008. Property valuers suggest that the firming of capitalisation rates so evident from April to July 2007 has since been eroded and they are consequently now applying rates last applicable in March 2007. 

It is against this somewhat negative backdrop that the ING Property Trust has reported a revaluation increase of approximately $43 million. Significantly, the increase is solely due to greater net income from rental reviews and lease transactional activity. There remains further opportunity for income growth because on average, current rental levels in the portfolio are assessed as being below the market by 6.7%, a larger figure than the 4.5% assessed at the 2007 revaluation. The average yield on market rentals from the Trust’s property portfolio is an attractive 8.3%.

While there is little absolute certainty over the future values of property assets, there is a benefit in a strong future income stream from a diverse base of quality tenants. The income streams from the ING Property Trust portfolio are the most diversified of New Zealand listed property vehicles and we believe that the Trust offers a good return from a relatively low risk asset base. 

Traditionally, an election year brings with it a period of uncertainty and we have in the past seen inactivity in the property markets during these times, relating to both occupancy and investment areas. This combined with the current market climate, means that we are expecting a relatively quiet property market for the remainder of the calendar year. The negligible vacancies in the portfolio combined with the excellent tenant retention rate and the strong diversified investment strategy, provide a comforting picture of a soundly positioned property portfolio. 

Acquisitions

During the year the Trust acquired five properties and two development sites, with a combined value of just over $77 million. These include:

• Pandora Road – an industrial building in Napier that is earmarked for conversion to an industrial showroom facility.
• 211 Albany Highway – a good-quality building in a strong North Shore location adjoining an existing asset of the Trust.
• 80 Springs Road – a well-located Auckland asset with future added-value potential when combined with the adjoining three assets of the Trust.
• Foundry Drive – a modern and well-located quality industrial property in Christchurch. Subsequent to balance date, the Trust has purchased a well-located bulk retail property at Wagener Place, Auckland, adjacent to the Westfield St Luke’s Shopping Centre.

The Trust has also contracted to purchase an industrial property at Port Hills in Christchurch. Acquisition of property adjoining existing assets is favoured for the potential to add value in the future. 

Sales

The Trust contracted to sell six properties during the year, realising gains of $3.9 million over acquisition price. Property held for sale is now held at market value under the new New Zealand equivalents to International Financial Reporting Standards rather than at the lesser of current market value or acquisition cost as under the previous GAAP standards. 

Investor returns

While the finance and capital markets remain in a state of uncertainty with apparently little in the way of reliable direction signals, the income returns from the Trust remain in good shape and provide an encouraging story based on a good quality diversified-income stream. The cash yield of the Trust is amongst the highest of the listed property stocks in New Zealand and is driven from the most diversified property portfolio. 

Investment quality

The Trust’s portfolio is characterised predominantly by grade A and B property.Since 2004, Management has been working to improve the overall investment quality of the portfolio through a sales and acquisition programme and by actively managing and investing in assets to improve quality levels. 

Active portfolio management

The active management of the property portfolio and tenants continues to be a primary focus of the Trust’s property management team. Active portfolio management incorporates portfolio rebalancing and the recycling of capital by way of asset sales when it is determined that value has been maximised, or the future return/risk profile of an asset does not meet the Trust’s ongoing criteria. Part of the Trust’s strategy is to acquire portfolios to re-position and rationalise over time. In addition, the Manager will review the strategy for individual property assets from time to time and where appropriate will recommend the disposal of properties. 

For the first half of the year the strong market conditions provided a high level of demand from private buyers for smaller real estate investments through to large offshore purchasers for more significant assets. In total, five properties were sold and settled during the year for $21.3 million, which realised net gains of $3.3 million over acquisition price, for the Trust.

In addition, the Trust has also unconditionally sold a property atRailway Street, Papakura for $6.5 million which is expected to settle in June, resulting in a realised gain over acquisition price of approximately $0.6 million. 

Looking ahead

While we are currently experiencing a difficult investment environment and little clear direction for capital values, the property market in general, and the ING Property Trust in particular, is showing strong fundamentals with occupancy rates and income levels looking very secure for the foreseeable future. 

We expect that income growth from the Trust’s under-rented position will continue to occur and that given the position in the market of the Trust’s portfolio any potential downside to asset valuations will be minimal.

The property market shows little excess capacity and will be able to respond quickly to any changes in the New Zealand economy. 

The positive effects of reduced new supply to the market and lower bare land values will provide an environment for future growth when conditions improve. The value of experienced and professional property and asset management is always better recognised in a more challenging market and we expect tenants to be increasingly cognisant of the quality of their landlord. 

The Manager remains confident that property occupancy fundamentals will be positive over the coming 12 months with the property portfolio well positioned to benefit from the rental growth in the local market.