GIC chases a slice of Amazon tower as tech-led property precincts take off in cities

An artist’s impression of the Charter Hall development at 555 Collins Street.

Technology-led business precincts are all the rage. Sydney is proposing a multi-billion dollar cluster of buildings around Central Station. And Queensland developers are pitching areas ranging from Brisbane’s Springfield to the Sunshine Coast as the next Silicon Valley.

But Melbourne has stolen a march on its rivals with a looming deal on an office tower to be anchored by Amazon which is being developed by Charter Hall, proving up the concept that technology players will become a key driver of value.

In a still under wraps transaction, the listed property funds and development company has drawn interest from Singaporean fund GIC in taking a slice of the new Amazon Web Services headquarters it is developing at Melbourne’s 555 Collins St.

Although the transaction is yet to be finalised, the move on the $800m-plus tower shows both the value of the latest office buildings and the strength of major technology tenants, particularly the $US1.4 trillion ($2 trillion) online retail behemoth.

Inside the Collins St office tower project.

The sovereign fund is in talks to take a 50 per cent stake in the development at 555 Collins St – ahead of the $800m tower being completed next year – alongside the Charter Hall Prime Office Fund, which snapped up the site from Fragrance Group four years ago.

The building is winning tenants, with the developer revealing last December it had secured Aware Super, which is coming out of three smaller locations. That brought the building’s precommitment level to 44 per cent, including the initial Amazon partnership, and others have since signed up.

The David Harrison-led Charter Hall has stolen the march on its rivals by developing precinct sized office projects in the Melbourne CBD and around the country, with these assets still attracting a premium even as interest rates rise.

The capitalisation rate on the transaction will be the low 4 per cent range with final metrics to be determined by the leasing on the remaining elements of the building. While the parties have declined to comment there is demand from tenants to be part of the tech and superannuation ecosystem in Melbourne.

GIC’s move is also a vote of confidence in the office sector after it pulled back from mooted plans to back Charter Hall in its purchase of an interest in Melbourne’s Southern Cross Towers.

The property funds group last month finalised the purchase of a half-interest in that $2bn complex, with the Charter Hall Prime Office Fund taking the interest in the landmark precinct in the “Paris End” of Melbourne’s CBD from Canada’s Brookfield and US private equity and real estate house Blackstone.

The fresh deal indicates the enduring depth of Charter Hall’s relationship with GIC, which has backed its flagship office and industrial funds for almost two decades and is working with Charter Hall on an even larger revamp of the Chifley precinct in Sydney. The Singaporean fund has also backed the company’s investments in areas ranging from service stations and counter-cyclical office plays.

For Charter Hall, the deal also shows its ongoing ability to transact in a rising interest rate environment, with the company able to develop new properties and introduce large-scale capital funds to local assets.

The company’s business model has come under pressure as commercial real estate deals have slowed but Charter Hall is keeping up the pace. It is focused on top office buildings which have the capacity to provide strong income through the cycle and its development plays are also paying off.

It forged into developing large precincts in Melbourne with Wesley Place and the 555 Collins St complex, and will also produce in future years with a second building to rise next to the Amazon complex.

Tenants are chasing the highest quality buildings rather than sticking with lower grade assets as these are not proving attractive enough to draw back employees to work.

While leasing markets are in recovery mode – with higher vacancy reported by the Property Council of Australia stemming from the wave of new supply which kicked off before the pandemic – the Collins St deal shows the best developments will win tenants and investors.

Amazon’s property moves attract close scrutiny and it is guarded both about its office locations and those of its data centres and distribution facilities. But it has transformed the logistics field by committing to a number of large sites in Sydney and Melbourne, and other capitals. It has close ties with industrial powerhouse Goodman Group.

GIC’s move signals it will continue to push deeper into Australian property. The fund is best known for its shopping centre investments and hotels but has also driven deeply into offices and alternative sectors including student accommodation and healthcare.

The Australian revealed in late 2020 that Amazon was negotiating a move to the Collins St precinct in Melbourne. Amazon will take about 15,000sq m to anchor the 48,000sq m tower. It will come out of a building in Exhibition St.