Charter Hall bets on capitals with $315m play

Charter Hall CEO David Harrison.

Property funds company Charter Hall has launched a $315m prime city office partnership that will hold half interests in two major towers in Brisbane and Adelaide.

The move to launch the trust, which will hold the assets worth this sum in partnership with other Charter Hall funds, signals that the firm believes investors will back top-quality office towers.

The partnership will invest in Charter Hall Wholesale Property Trust, which in turn is acquiring 50 per cent interests in two prime CBD office properties – 275 George Street, Brisbane, and 2-10 Franklin Street, Adelaide. The stakes are currently held by other Charter Hall funds.

275 George Street, Brisbane

The pricing on office blocks could also provide a signal to the market about how offices in those markets are faring, with both markets dodging the leasing woes of Melbourne and parts of Sydney.

The prime city office blocks are leased to major corporate and government tenants and are 99 per cent occupied. Their tenants include the federal government, the SA government, BHP, Shell and Telstra.

They have 3.5 per cent weighted average annual rent reviews, a 5.3-year weighted average lease expiry and an average building age of just 10.5 years.

GPO Exchange

The buildings both have strong prospects but the portfolio acquisition price reflects a 10 per cent discount to their June valuations, which shows there are still good opportunities for investors to get an exposure to offices in this early part of the cycle.

The stakes in the two towers are being acquired at an initial passing yield of 6.7 per cent and the fund will have an average distribution yield of 7.2 per cent over five years.

Charter Hall estimated the buildings were 10 per cent underlet, providing an opportunity to lift rents in future.

It will be geared at about 50 per cent and it is buying the assets at about a 35 per cent discount to replacement costs – as construction costs have soared.

The offer shows the overall reset in the office market.

In 2021, the Charter Hall Prime Office Fund acquired the remaining 50 per cent stake of 275 George Street in Brisbane from Keppel REIT, taking its ownership by its funds to the entire building via a $264m deal.

Charter Hall developed the prime Brisbane CBD office building in 2009, along with the adjoining 69 Ann Street, after winning major tenant precommitments, which had Telstra occupy 50,000sq m of office space across both buildings.

The twin-tower complex, which comprises a combined 68,400sq m of lettable area, is one of Brisbane’s largest sites, comprising a total site area of 8000sq m adjacent to the Brisbane Town Hall and directly opposite the Brisbane Square precinct. The core capitalisation rate for the 2021 deal was 5 per cent.

The new Charter Hall trust also includes a stake in the GPO Exchange, one of Adelaide’s top towers, that was developed by Charter Hall. It comprises a 20-storey prime office tower alongside the restored heritage Telephone Exchange Building.

Its top tenants include BHP occupying 11,600 sqm and the South Australian Attorney General’s Department occupying 12,230 sq m.