Auckland International Airport (AIA), which has a 441 hectare commercial land bank, offers a better property investment opportunity than any of the countries listed property trusts, according to Goldman Sachs JBWere.
In a research report entitled NZ's best property exposure, Goldman equity analysts Marcus Curley and Adrian Allbon argue AIA offers better property exposure than any of AMP NZ Office Trust, ING Property Trust, Property For Industry, Kiwi Income Property Trust, Goodman Property Trust, the National Property Trust, ING Medical Properties Trust or the Kermadec Property Fund.
Their view is based on AIA's high quality revenue streams driven by its obviously close proximity to passenger and freight services, its occupancy levels of 98% versus the listed property trust average of 95%, long weighted average lease term of 5.7 years versus 4.8, and their view AIA should be able to grow its distributable profit from non-aeronautical activities by 6.5% a year between 2011 and 2013 compared to an average decline from the property trusts of 5% annually.
"Our analysis suggests AIA's non-aeronautical activities comfortably warrant a reasonable valuation premium over NZ listed property companies reflecting its high revenue quality and strong growth prospects," Curley and Allbon say.
They value AIA's land bank at NZ$270 million on a discounted cash flow of future property developments basis, or 21 cents per share. That's 13% above the company's own NZ$240 million valuation.
But at NZ$61 per metre squared, the valuation is well down on the NZ$200 per metre squared commercial land at Airport Oaks, Wiri and Goodman Property Trust's land bank is valued at, reflecting AIA's gradual pace of land development with the Goldman analysts saying developments after 2030 are effectively worthless in present value terms.
They argue that increasing its rate of commercial land development should be a high priority for AIA, which is already developing two hotels due to be open before next year's Rugby World Cup.
The Goldman analysts note AIA's 10-year average capital expenditure on property is NZ$15 million. But the key assumption in their number crunching is based on AIA splashing out NZ$20 million per year in capital expenditure on property development over the next decade and increasing this by NZ$5 million every five years from 2020.
However, to unlock more value, AIA should develop its land bank faster over the next decade by spending more money, the analysts argue.
"If AIA doubled the pace of development to NZ$40 million per annum (8 hectares), our commercial land bank valuation would increase by NZ$85 million or 6c per share," Curley and Allbon say.
"We take heart from recent development wins and management's more aggressive approach to competitive tenders. These efforts should be supported by improved motorway access and flow on benefits from creating a larger critical mass of property-related activities."
"In our view, this should be a high strategic priority for AIA."
AIA, whose CEO is former Telecom executive Simon Moutter, already has 50 hectares of commercial land developed and tenanted. The two hotels its building are a 4-star, 263 room Novotel through a joint venture with Tainui Group and Accor Hospitality and a wholly owned 2-star, 125 room Formule 1 hotel. Goldman expects AIA's NZ$21 million investment in the two hotels to break-even in the company's 2012 financial year with positive earnings contributions after that.
They note the remaining land, including 140 hectares around Puhinui Road and AIA's 45 hectare gold course, generally has limited scope for commercial development at this stage but note the company currently plans to retain all of its land holdings to protect the airport's footprint and limit opposition to future commercial development.
Curley and Allbon also note AIA recently separated a 201 hectare chunk of its land bank into seven specialised precincts with common use themes. These include warehousing and logistics, airport cargo, office and passenger services, retail and entertainment, low-density recreation and office buildings, plus terminal precincts.
Goldman's analysis suggests full development of the land bank, excluding the Puhinui Road area and golf course, by about 2062.