TelferYoung (Nelson) Limited

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Nelson Newsletter - Summer 2007

30 January 2007

Welcome to our first edition of the TelferYoung Nelson Newsletter for 2007. This issue covers some aspects of commercial property.

Premises Description - Getting It Right

Two recent cases have highlighted to us the need for accurate descriptions of the premises and of the lessor's and lessee's fitout in commercial leases.

Everything is usually clear at the commencement of the lease. However, as parties to the lease change and as time moves on to future rent reviews, the parties generally refer back to the lease documentation to determine the status of the premises for the rent review. Poorly drafted premises descriptions and lack of clarity on ownership of fitout can lead to unfair bargaining and costly resolution to the parties at future rent reviews.

In the first case, a rent review, the lease accurately described the premises but failed to identify that the lessor owned partitions, floor coverings and airconditioning. Minor improvements one might think, but contributing to a difference of some $6,000 in the rental. Significant additional time was required to research the history of payments for the fitout so to correct the record for the review and provide the just rental to the lessor.

The second case, a rent review arbitration, was more costly to resolve. The premises description in the lease failed to include a mezzanine floor, had the wrong floor area and further failed to identify any of the lessor's fitout. This dispute lead to a breakdown in the lessor/lessee relationship and as time progressed more fuel was added to the fire. It was an expensive process over a 9 month period which could have easily been avoided by another 15 minutes of the advisors time at the drafting of the lease.

Valuers rely on the description of the premises and fitout contained in the lease for completing rent reviews. It is important to get it right at the start. If you or your legal advisors are in doubt consult your valuer to ensure the right information is included.

Office Market - Sailing Ahead?

The market for Nelson office space is now even keeled. The market has returned to an equilibrium of supply and demand over the past 5 years after languishing in the doldrums for several years following the crash in office rentals in the 1990's. In fact, office rentals have only just returned to the bench mark levels set in the 1990's. However, it is not all plain sailing ahead.

TelferYoung have been involved in advising clients on several proposed new office developments. With the rise in construction costs, 'hurdle' rents of $170 - $180 per m², on a bare shell basis, are needed in order to effect economic development. Asking rents at these levels have met stern resistance from local tenants. Understandably so, as the tenants draw benchmarks from the existing stock of office space which generally shows a range of $100 - $150 per m² on a bare shell basis. New developments over the past 3 to 4 years have generally achieved rentals of between $135 - $160 per m². Therefore a significant shift in tenants perception for better quality space will be required before new office development takes place.

A national comparison from TelferYoung offices shows prevailing bare shell rentals for new space in the upper quartile office market as follows:

The rentals reflect TelferYoung's interpretation of market evidence for near new, lift serviced, first floor office space of 500 m². The comparison being for bare shell with suspended panel ceilings, flush mounted lighting and partitioned staff amenities.

The national comparison suggests that a shift in Nelson rentals is due. We caution that the market is largely set by local benchmarks, and for an uplift in rental rates to occur, a shift in tenant expectations and hard balling by developers and landlords will be required. For change to occur in the market for mid-range existing office space, lessors will need to negotiate firmly on new lettings. The new letting evidence forms the basis for valuations on rent reviews.

Should we be fortunate to see new development occur, a feature of new office space for corporate and government tenancies may be a move to 'green buildings'. Features such as recycled stormwater and a focus on thermal transfer and energy efficient design are becoming key requirements for these tenants.

Large Format Retail

Recent new letting evidence in Richmond and the peripheral retail areas of Nelson signal a potential shift in rentals for large format retail premises. This evidence shows general ranges of $150 - $220 per m² on a bare shell basis. A significant influence on rentals for large format retail is the benchmarking of rental levels by tenants on a national basis rather than focusing solely on local rental evidence.

Whether this recent trend flows through into the central retail area will be dependant on two significant opportunities currently available in the form of the Fashion Island development and for the tenanting of the former H&J Smith site, whatever format that may take.

Commercial Sales

The 2006 year has been typified by a low volume of commercial sales but a number of high valued sales occurring.

Larger sales of note include:

294 Queen Street - 01/06 - $2,162,500 - Arthur Wakefield Motor Inn sold as investment at 8% yield.

250 Queen Street - 05/06 - $1,653,000 - Star & Garter Hotel and florist on prime corner in central Richmond sold at 7.5% capitalisation rate.

Hardy Street - 03/06 - $6,050,000 - Former Mitre 10 site of 5800 m² of land and 4900 m² of building sold mainly vacant for redevelopment.

Trafalgar Street - 06/06 - $2,500,000 - Multi-tenanted two-storey building on north eastern corner of Bridge Street. Sold at capitalisation rate of 8.5% on passing rent.

132 Collingwood St - 07/06 - $2,925,000 - Former BJ's Gym site of 2500 m² with 1300 m² of building sold subject to redevelopment proposal.

We anticipate continued strong demand for commercial investment property. Limited available investment opportunities combined with investors current perception of continued rental growth will act to hold capitalisation or yield rates below equivalent mortgage costs. Lower priced investment sales around Nelson have been quoted at capitalisation rates close to 6% however, after adjustment for potential rental growth, returns are generally closer to the 7% mark.

Back issues of the newsletter can be obtained from TelferYoung (Nelson) Ltd
Phone (03) 546-9600
Fax (03) 546-9186
www.telferyoung.com
email: telferyoung@nelson.telferyoung.com