AEW eyes $400m deal as Challenger offloads assets

Financial services company Challenger is moving closer to its goal of disposing of about $1 billion worth of real estate assets.

Challenger CEO Richard Howes. Picture: Britta Campion

Financial services company Challenger is moving closer to its goal of disposing of about $1 billion worth of real estate assets, with US funds manager AEW Capital in line to take a $400 million slice of assets held in its life company portfolio.

A sale would mark the culmination of the firm’s off-market talks, with a range of players interested in Challenger towers in Melbourne, Brisbane and possibly Canberra.

Challenger has quietly marketed direct assets in these cities and Sydney after taking a strategic decision to lighten its real estate holdings and shift into fixed-income instruments.

Challenger’s direct property portfolio in Australia comprised about $2.9 billion worth of assets and is weighted towards office properties but also includes logistics and retail properties.

Buildings thought to be marked for disposal include the 22-level 31 Queen Street in Melbourne, which Challenger holds at $165m on a capitalisation rate of 5.25 per cent, and 13-level Mackinson House in Brisbane which has a carrying value of $85m.

A further asset, potentially in Canberra, may also be involved, but the final shape of the deal is yet to emerge.

The company’s overall property portfolio was $3.7bn net of debt at the end of December and fell in value by about $100m in the first half as it sold assets.

Challenger said at its half-year results last month that with strong demand from offshore capital compressing property rates in certain sectors, the relative attractiveness of holding property over fixed income had reduced.

The company did not comment on the latest talks but said at its results that it was in the process of disposing of a number of properties, with the proceeds released to be reinvested in fixed-income investments.

Challenger expects the allocation to property to reduce from 21 per cent at the end of June 2018 to the mid-teens by the end of this financial year.

During the first half Challenger sold five direct properties for about $400m, with four more due to settle in early 2019.

The company also disposed of its real estate investment trust holdings in August last year.

Challenger’s property assets include a net $315m exposure to Japanese property, consisting of suburban shopping centres focused on non-discretionary retailing.

Boston-based investment man­ager AEW Capital Management has been bolstering its Australian holdings and bought 19 Harris Street in Pyrmont in one of the largest plays in Sydney’s fringe market last year.

AEW, which declined to comment, in 2017 bought 54 Miller Street in North Sydney from Chinese-backed Aqualand for about $60m.