CBD office deals show a market reset taking hold

PAG is targeting a $400m-plus CBD tower in Sydney’s Market St. Picture: Getty Images

Hong Kong-based private equity group PAG is targeting a $400m-plus CBD tower in Sydney’s Market St which has been put into due dilligence by Dexus.

It’s the latest example of how the big reset of the Australian office market is under way, led by Sydney.

The impending deal on the city block is likely to be struck at about a 15 per cent discount to earlier values, indicating that local office markets may have dodged the worst of global woes hitting the sector.

US markets are weighed down by high vacancy levels, landlords giving indebted towers back to lenders, and a structural shift away from offices.

But the more constrained Australian city markets are finding value, workers are returning to their desks and rents are rising. New projects are being pushed back and premium space is still being snapped up by tenants.

Dexus already has funds house Quintessential Equity conducting due diligence on a tower at 1 Margaret St for about $296m.

The tower at 44 Market St was held by Dexus at about $475m on a 5 per cent capitalisation rate but this will likely shift out in keeping with higher interest rates.

The latest sale is being brokered by JLL and Knight Frank but they and the parties declined to comment.

Dexus is selling partly to fund the development of new premium towers in Sydney and Brisbane but also to pursue new plays in funds management – where it is wrapping up the acquisition of the local Collimate Capital platform – and healthcare, in which its funds have lifted their stakes in an Adelaide hospital project.

Hong Kong-based private equity group PAG is a well known property trader and lender in Australia. It sold a 50 per cent stake in another Sydney office and retail complex – 60 Margaret St and the MetCentre – to Blackstone in 2018 in a play that valued the whole complex at $800m.

The Market St block has 26 levels of A-grade office space with 1000 sqm of typical floor plates.

Although the office market is under pressure, big trades are beginning to take hold, with Mirvac also selling blocks in Sydney and Melbourne.

Charter Hall is also selling assets; a co-owned building in Brisbane is in due diligence for more than $70m and buyers also vying for assets in Melbourne and Perth.

The GPT Group is selling a half stake in the $1.2bn Australia Square complex and Stockland is chasing a capital partner on a $1.5bn development in North Sydney.

Mirvac and Blackstone are now separately finalising the sale of 60 Margaret St and MetCentre for about $820m. It is being purchased by a consortium involving local house Ashe Morgan and Japan’s Mitsubishi, and capital raising is being finalised.

UBS analysts said the Dexus asset sales would reduce gearing by about 3 per cent but a 10 per cent devaluation in the office portfolio would add 2 per cent back, which implied further asset sales or capital partnerships would be an ongoing feature required to fund the pipeline.

The company has committed to $2.5bn of developments, including Waterfront Brisbane, Sydney’s Atlassian tower, and logistics projects.

Dexus is moving towards becoming an asset real asset manager. A the health deal in Adelaide, via two of its managed funds, shows where it is headed.

UBS said that ongoing asset sales by Dexus or a lowering of its payout ratio in line with property funds companies may be necessary to fund new business opportunities and growth.