Office money flows back as investors punt on the market recovery

Investors, particularly in Melbourne, are betting on the office market’s recovery.

The dramatic rerating of office markets around the country is drawing private capital back into the sector with money coming from savvy local players betting markets will recover.

Their early plays range from secondary office markets to buildings in the heart of capitals along the eastern seaboard which show solid potential as leasing markets stabilise.

Investors backing the funds are receiving high returns of up to 15 per cent and managers are finding good pickings as global players trim their portfolios and refocus on their home markets after expanding during the property boom.

Big names including Elanor Investors Group and Forza Capital have already been active and, in one of the latest plays, investment manager Bayley Stuart is looking to snap up an office block in Melbourne’s Bourke St for about $120m.

The move comes as other nimble players hunt out deals as prices have shifted enough to make capital willing to back more office plays, following syndicators who have already moved on retail property purchases.

In the Melbourne deal, Bayley Stuart is in due diligence to buy the building from Swiss institution AFIAA, with the deal to be one of the first major transactions in the city’s office market after a series of assets were taken off the market last year.

AFIAA put the CBD tower at 628 Bourke St on the block last year, about six years after it picked it up via an asset swap with fund manager M&G Real Estate Asia for $181m.

AFIAA is selling 628 Bourke St in Melbourne.

AFIAA tapped Knight Frank to sell the asset but the firm and parties did not comment on the deal that would mark a move into the CBD by Bayley Stuart. It is already one of the city’s best known investment houses and is readying to raise capital, industry players said.

The company has offices across Melbourne including complexes in Cremorne and on the St Kilda Rd precinct. It has bought since the pandemic and picked up an office block in East Melbourne from Harmony Property Investments in 2022.

The A Grade offices in Bourke St span 24,127 sqm and sport high environmental ratings after AFIAA poured almost $35m into refurbishing the tower.

It is about 90 per cent leased to government and listed corporations, including CPB Contractors, Academies Australia Polytechnic, NTT Data, V/Line and Kinetic.

Other managers with a track record of counter cyclical investing since the global financial crisis have already snapped up office assets.

Forza Capital bought an A-grade block in the Sydney CBD from a fund run by Investa for about $130m earlier this month.

The building at 117 Clarence St traded after an earlier deal was struck at just over $138m, with the latest transaction showing a yield of about 8.4 per cent.

The building was sold by Investa Property Group’s flagship wholesale fund, which had picked up the block for $153m in 2018 from Singaporean groups Roxy-Pacific and Tong Eng Group, when it had ambitions of a major tower on the site.

Roxy-Pacific and Tong Eng are selling 117 Clarence St, Sydney.

Investa instead refurbished the block and is now focused on its premium office holdings, which many landlords believe are best insulated from the fall-off in value across the sector.

Forza said it had completed an $87.8m capital raising from its wealthy clients. The 12 level offices span about 12,500 sqm, which is fully leased, mainly to the NSW government. “The Sydney CBD office market is extremely tightly held with a scarcity of investment grade CBD assets and the acquisition fits in with Forza’s value-add investment strategy,” Forza director James Kelly said.

“Forza intends to progressively upgrade the asset with improvements provisioned for key services including lifts, airconditioning, heating and other base building amenity with the intention of increasing the NABERS rating from 5 to 6 stars.”

The sale was handled by Knight Frank’s Paul Roberts, Ben Schubert and Jonathan Vaughan and Cushman & Wakefield’s Steve Kearney and Josh Cullen.

Forza has a long record in offices. In 2021, it picked up 399 Lonsdale St in Melbourne’s CBD for $86.8m from Hong Kong investors and that year it also used a $30m loan from the Clean Energy Finance Corporation to buy and refurbish 200 Creek St in Brisbane’s CBD.

The trend is national.

Sentinel Property Group has bought into Botanicca Corporate Park in Richmond.

In Brisbane, at the end of last year, listed fund manager Elanor bought 55 Elizabeth St, Brisbane, from a Credit Suisse-run fund for $172m, saying it offered “deep value” investment returns and raised $109m from wealthy backers. The prime grade block spans about 19,250 sqm with 97 per cent of its income generated by its federal government tenant.

Elanor co-head of real estate, David Burgess, said the Elizabeth St trust the firm had set up was a high return investment opportunity in the right market at the right time.

“The acquisition price represents an initial yield of 10 per cent and is more than 50 per cent below the property’s replacement cost. The property is well positioned to benefit from the strengthening Brisbane CBD office market,” he said.

Meanwhile, in Melbourne, Sentinel Property Group this month completed the $80m purchase of two office buildings on the CBD fringe. Sentinel raised more than $50m from investors to acquire the assets in Botanicca Corporate Park in Richmond from the listed GARDA Property Group, with a yield at 9.32 per cent.

The price was almost one third below replacement cost and a 39 per cent discount on the property’s April 2022 book value of $132m. The Botanicca assets will be held in a five-year close-ended trust.

Sentinel CEO Warren Ebert said the non-listed real estate investment trust was aiming to pursue more office, retail and industrial assets.

“In 2024, we’re looking to be very aggressive as I think this year there’s going to be some fantastic buying, particularly in the office area,” he said.