National property news
St Lukes Group to Develop Shopping Mall on Mercury site

St Lukes Group is believed to be set to create a shopping centre of up to 60,000sq m on the Mercury Energy site in Newmarket Auckland. St Lukes' chief executive David Kennedy and Westfield New Zealand director Grant Hirst said the total acquisition cost of $50 million included freehold sites next to the Mercury block as well as a long-term lease on the former Auckland Electric Power Board headquarters and works depot, which covers just over 2ha.

Tramco, headed by property developers and investors Mark Wyborn and Adrian Burr, bought the Mercury site for about $25 million almost two years ago and looked for a buyer of the leasehold interest who would take all the development risk. Negotiations were completed recently with St Lukes and Westfield NZ, which manages the St Lukes portfolio and runs development for the listed shopping centre owner.

The company's flagship centre at St Lukes covers just over 33,000 sq m. Mr Hirst said the proposed multi-level enclosed mall, including entertainment and cinemas, would be at least the size of St Lukes, but he said the dimensions had yet to be decided. St Lukes has stepped up its development programme since Westfield Trust, listed in Australia, bought BT Australia's controlling interest last year to put both ownership and management in the Westfield camp.

The long-planned $100 million Glenfield centre expansion is underway and last month St Lukes bought four Village Force cinema complexes to help its shopping centre development strategy.

International
What is the Cost of Capital for listed Property Trusts?
Key issues highlighted at a Securitisation conference held recently in Australia

The key factors, which determine the cost of capital, include:

Based on current forecasts from the property division of Warburg Dillon Read, the average yield for listed property trusts is currently 7.5%. Taking into consideration growth expectations and the cost of equity this is closer to 9.5%. The cost of capital for this sector is about 9% when you take into account sector gearing of 25% and debt costs of 7%.

Including management expenses, the cost of capital for property trusts increase’s to around 9.5%. This is effectively the hurdle rate for the listed market to make acquisitions and undertake expenditure. There is therefore no surprise that the discount rate for property valuations has fallen as low as 10% for premium assets in Australia. At this point, it makes sense for property trusts to acquire the assets without destroying value. The above cost of capital is low compared to the cost in the US and UK property markets. In both these markets, the rate is well over 10% and the access to capital is limited.

This year, there has been just over $1 billion raised for US Real Estate Investment Trusts (REITS), compared to $12 billion in 1998 and $22 billion in 1997. In the UK, there has been just over £600 million (GBP) raised this year of which £580 million was the Canary Wharf.

Gary Cheyne and Richard Chung are principals of the Ernst and Young Real Estate Group.