KKR eyeing $8bn office landlord Dexus, say sources

Rivals are also testing the merits of a buyout of the country’s largest office landlord.

Just weeks after suggestions Blackstone was weighing a revived tilt for Dexus, there’s now talk that its rivals are also testing the merits of a buyout of the country’s largest office landlord, including Kohlberg Kravis ­Roberts.

The office sector has been slammed amid a weak economic backdrop, as workers have avoided coming into the office after the pandemic hit in 2020, creating one of the worst sector downturns in almost two decades with record vacancy rates.

But as employers force staff back into the office, and with interest rate cuts on the horizon, many are picking the bottom of the office market.

In the US, values have slid by more than 50 per cent, but Blackstone’s recent purchase of a major Manhattan office building was taken as a sign the savvy investor now sees good buying in the sector.

In Australia, landlords trade at 30 per cent discounts to their asset values.

The Sydney market is expected to have seen the worst, picking up late last year, but some believe there is still more pain to come in Melbourne, where the office market has the country’s highest vacancy rates at 18 per cent.

Australia’s CBD office vacancy rate is at 13.7 per cent, and 17.2 per cent for non-CBD markets, the Property Council says.

In Sydney, the only new major office projects under development are the Atlassian building near Central Station, Chifley Square and 55 Pitt Street. Given leasing demand, any new development is expected to be four to five years away.

The Dexus share price is $7.31, which compares to its $8.97 NTA.

With a market value of $8bn, any suitor would need to offer over $10bn for the prize portfolio of offices, infrastructure assets and fund management platform.

A bid by KKR for Dexus would be its first major foray in Australian real estate. It invests in the sector in Europe and the US, where it outlaid $US2.1bn in June as part of its largest ever purchase of apartment buildings, The Wall Street Journal reported.

Other potential suitors are US-based Starwood Capital or Ares Management.

Last year, Blackstone sources dismissed talk it was looking at Dexus, but multiple sources say it had been doing work on a possible transaction last year with an offer stacking up at about $8 a share, equating to about $8bn.

However, the understanding is that the New York-based private equity group, the largest in the world, has cooled on the opportunity for now.

The drawcard was Dexus’s fund management platform, which now includes infrastructure and property assets following its acquisition of AMP Capital.

It has a $14.8bn portfolio and manages $39.7bn for third parties.

Some believe the Dexus board will not accept an offer unless it was at NTA.

Dexus owns some of the best-known Australian office towers, including the MLC Centre in Sydney and 360 Collins Street in Melbourne, as well as airports and key infrastructure assets.

In its portfolio are offices worth $20bn, $11bn worth of industrial properties, $9bn of retail, $2bn of healthcare, $11bn of infrastructure and $1bn of alternative investments.

Of its funds under management, 27 per cent is in infrastructure, 26 per cent in offices, 22 per cent in retail and 18 per cent in industrial.