Manager's Overview

Property as an investment class cannot exempt itself from the remainder of the domestic and global economies and to some extent must respond as quickly as is possible to the environment within which it operates. In the same manner, property as a service provider to business must respond as quickly as is possible to the requirements and desires of those businesses in providing the accommodation solutions to empower business to succeed domestically and on the international stage.

The recent performance of economic and financial markets have taught several strong lessons to property investors. These lessons were also learned in earlier periods of economic challenge, but recent events have  illustrated that many managers and investors had forgotten them. These lessons are recognised in the Argosy strategy:

• Diversification 
• Liquidity (providing an exit strategy) 
• Development risk management.

Argosy's strategic focus on diversification and liquidity has ensured that the portfolio has been able to be managed in a manner that means capital management has not diluted the return for unitholders unable to participate in any capital raising initiative. The low risk approach to development has avoided excessive exposure to this higher risk area of the market.

Strategy

The short term strategy is focused in three key areas:

• Risk mitigation 
• Capital management 
• Portfolio structuring for the future.

The management team has delivered demonstrable results over the period of financial crisis in these three key areas and this success has improved opportunities for the future, with out the need to riase further capital.

Sales

Last year’s target to reduce debt levels by the sale of property to 35% of property value required the sale of $100 million of property, which was achieved by finalising unconditional contracts for the sale of 15 properties before the end of 2009. The early success of this strategy has been fortuitous due to the lower investment activity levels in the wake of the Taxation Working Group report and the subsequent Government budget which will cause a decrease in the level of tax deduction applicable to property assets.

With greater stability in the market, sales activity for the coming financial year will be focused on normal asset management, rather than the comprehensive sales programme announced in previous years. It is expected that there will be some sale and acquisition activity during the year as part of normal optimisation of the portfolio, in terms of both risk and return levels. During the period of contraction in the New Zealand property market as a result of the global financial crisis, the company elected to sell property assets rather than raise.

Budget 2010

The Government budget heralded some changes to the method of taxation of property in general, removing the ability to claim depreciation. Naturally this could have an affect on the return to unitholders as a result of increased taxation. Exactly what affect this will have on distribution levels is yet to be finalised, because also announced in the budget was a review by the IRD on which parts of a building are determined to be “building structure”. It is possible that this definition may be extended to include items that we would normally regard as building fit-out or services.

Looking ahead

The year ahead will continue to be challenging. The economic environment remains tight and vacancy levels in both offices and industrial remain uncomfortably high. Occupancy remains a key focus to ensure that vacancy in the portfolio is minimised.

Argosy is positioned well at Manawatu Business Park with titles expected during the current quarter, and a number of sales confirmed subject to issue of title.