Precinct Properties CEO says rising interest rates ‘ultimately’ parked $1.5b 55-level Downtown Carpark office tower
Rising interest rates prompted Precinct Properties to park its $1.5 billion 55-level planned office tower on the Downtown Carpark site near Auckland’s waterfront.
Speaking today on Herald NOW Business with Garth Bray, Precinct chief executive Scott Pritchard cited that as the main prompt for Friday’s gutting decision.
“Ultimately, bond yields: global interest rates really are setting the benchmarks for valuations, so [it was] not necessarily a turnaround in increasing costs or inflation, although they did have a part to play.
“But when you see interest rates rise to the extent that they have over the last year or so, what that does is give cause for concern around what valuations might do.”
Asked how it was at his office on Friday, Pritchard said it was “a punch in the nose for our business”.
Pritchard cited the residential real estate equivalent as an example of how rising rates prompted valuation change.
Anyone who owns a house when mortgage rates go down could see house prices rise, he said.
Conversely, when mortgage rates go up, there could be downward pressure on house prices.
So it was precisely the same principles for commercial real estate, Pritchard said.
With long-duration large-scale projects like the planned huge office tower, Precinct needed a stable economic environment.
“Yet what we’re seeing now is quite a lot of volatility and also the trajectory,” he said of the outlook for interest rate volatility.
In the past 12 months, there had been continued increases in interest rates.
“It’s hard to see them coming back, so that’s really the key driver in this decision.”
Asked about the advantage of half the planned tower being pre-let, Pritchard described that as the silver lining.
The company had been heavily encouraged by extremely strong tenant demand.
It had four large organisations looking to pre-lease half the entire tower.
Demand for the planned tower was equivalent to Precinct’s biggest tower in its portfolio, he said, referring to the PwC Tower.
What that represented was strong economic growth.
Pre-leasing had demonstrated high demand for Auckland’s city centre.
“That’s the frustrating bit is that we haven’t been able to convert on this occasion.”
Tenants wanting to sign for the new tower would not have moved in for five years, but were recognising the benefit of having workers in high-quality offices, not working from home.
Asked if the board or management delayed the tower, Pritchard said management worked with the board when making decisions of that scale.
“We’ve been working on this project for six years. We had resource consent, we had really good demand on the occupier side, we had fast-track.”
Ultimately, the company had to act in the best interests of shareholders and their capital. Precinct could not just commit to a project because it had made some progress.
It could not develop a project that could be worth less in valuation than it cost to develop, he said.
Anne Gibson has been the Herald’s property editor for 26 years, written books and covered property extensively here and overseas.
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