Countdown supermarket syndication with 20-year lease
Smaller investors are being offered the opportunity to share in the ownership of a Countdown supermarket, which comes with a new 20-year lease, in the latest proportionate ownership scheme to be launched by Augusta Funds Management Limited.
The scheme is being established to acquire the land and buildings occupied by supermarket alongside State Highway One in Huntly from its occupier General Distributors Limited for $8.3 million. It will provide investors with a projected initial annual income return of nine percent as detailed in the Offeror’s Statement for the investment.
A total of 109 individual units are being offered, at $50,000 each, which provide investors with a beneficial interest in a proportion of the property’s registered freehold title. Mike Houlker and David Gubb of Bayleys Auckland and Andrew Shaw of Bayleys Hamilton are marketing the units, with subscribers able to apply for more than one unit.
Houlker says the Countdown outlet is the only supermarket in Huntly, the largest township along State Highway One between Auckland and Hamilton and services not only the township but surrounding rural areas in all directions.
The 3,205sqm supermarket (excluding canopies) was constructed in 2007 and is located on a prime, high profile 9,764 sq m site between State Highway One and Tumate Mahuta Drive. The single level building covers approximately 33 percent of the site and has extensive car parking.
The property has a brand new lease of 20 years, with rights of renewal totalling 40 years, to General Distributors Limited, a wholly owned subsidiary of Progressive Enterprises Ltd which is the New Zealand operating company of Australian publicly listed supermarket giant, Woolworths Limited.
“A 20-year lease to a tenant of this calibre makes this a compelling offering and as a result we are expecting strong interest from investors,” says Houlker.
The lease is structured on a gross basis and has a turnover provision. It will provide an initial base rental of $725,000 per annum which includes all outgoings. An additional turnover rental will kick in annually if the supermarket’s revenue exceeds certain thresholds. Every fifth year of the lease, the base rental is subject to increase by the average of any turnover rent paid during the previous three years.
Mark Francis, managing director of Augusta Funds Management Limited, says this provision offers the prospect of good future income growth from the property, with the supermarket currently trading at a level which is not far off activating the turnover clause in the lease.
“The Huntly supermarket’s turnover could be expected to increase as grocery prices continue to rise, particularly as there is no major competitor operating in the area,” he says. “Food prices make up a substantial component of the Consumer Price Index and as a consequence they have historically tended to rise in line with inflation. This suggests that the turnover component to the rental should provide a good hedge against inflation.”
This is the third proportionate ownership scheme involving Countdown supermarkets to have been promoted by Augusta and marketed by Bayleys in the last 18 months. Two other larger Countdown offerings at the Fraser Cove and Westgate shopping centres in Tauranga and West Auckland were successfully syndicated.
“One of the big attractions of supermarket properties for investors is their very long leases – a 20-year lease is pretty extraordinary,” says Houlker. “There are also really only two big players in the retail grocery market here, Progressive and Foodstuffs, and a long lease to one of them is as sought after an investment as you can get. This type of opportunity simply wouldn’t be available to smaller investors other than by this form of investment.”
Francis says the acquisition of the Huntly property will be conservatively geared and funded by way of prime non-recourse bank loan of 39.6%, with the balance by way of investors’ equity. He says it is intended that the interest rate on the bank debt will be hedged via a blend of short and long term swaps.
Augusta Funds Management will manage the Countdown property on behalf of investors, including facilities management, preparation of annual financial statements and payment of monthly distributions. Augusta manages approximately $260 million of investment property around New Zealand.
Mike Houlker says this is the 21st proportionate title scheme that he and David Gubb have been involved in marketing, with a total value of approximately $230 million. He says the offerings continue to be popular with smaller to medium sized investors because they provide access to high quality, high value commercial and industrial property that would otherwise be beyond the reach of such investors.
“It provides an investment structure that allows investors to pool their capital to purchase and profit from large-scale properties which produce higher income returns than smaller properties of similar quality,” he says.
Francis says the best syndicated property offerings all have the same features - a quality building in a good location with a strong tenant or tenants providing secure cash flows on a long-term lease - with a term of at least eight years considered to be the minimum acceptable for this type of investment.
“A long lease, like the Huntly Countdown one, provides the flexibility to take advantage of peaks in the market to possibly consider selling while there is still a good number of years to run on the lease for the next owner. It also provides significant flexibility in funding arrangements as banks are reluctant to fund properties with short-term leases on an interest-only basis and normally require principal reductions.
“At the end of the day though, the most important aspect of syndicated property, like any investment, is the quality and track record of the manager.”
On the web: www.supermarketinvestment.co.nz
