Blackstone pulls $1bn Sydney tower sale but local market holding values

Australia’s office market is at a turning point but big investors are getting more certainty about the value of their towers.

Blackstone has paused the sale process for the JPMorgan tower in Sydney’s CBD.

US private equity giant Blackstone has surprised the commercial property market by pausing the sale of the JPMorgan office tower in the heart of Sydney’s central business district for which it had hoped to reap a boom price of up to $1bn.

The famed investor’s campaign to sell the prize tower, which sits above Westfield Sydney, ran up against global concerns about the shifting value of offices, particularly in the northern hemisphere, and the local impact of higher interest rates on the economy and demand for space.

While the building is the latest to miss expectations as the bids did not hit the private equity vendor’s lofty expectations, other players are meeting the market and striking deals that show the reset in Australia is smaller than had been feared.

Blackstone declined to comment but is understood to have paused the process in order to assess market trends over coming months, with the deep-pocketed investor well placed to ride the cycle. The firm has an asset empire of around $US1 trillion and significant resources to deploy.

It is in the ranks of the top echelon of office owners arguing that the split in the market favours their high quality portfolios and will give them time to lock in new leases with corporate tenants bringing workers back to offices.

Blackstone renewed JPMorgan for seven years and the tower is benefiting from a strong shift in the return to work. It picked up the tower as part of a $1.52bn package in 2019 and has already successfully sold two smaller buildings.

The investment house has been under scrutiny globally as one its flagship funds for wealthy individuals has been dealing with high withdrawal requests.

But it has adapted to the new environment and last week closed on its largest global property drawdown fund, with $US30.4bn ($45bn) raised for opportunistic deals across sectors such as rental housing, hospitality and data centres.

The Australian can reveal that more investment sales are being struck around the country with a focus on markets including resources capitals Brisbane and Perth, which are showing better leasing dynamics at the top end than larger capitals.

Canadian group Brookfield is selling an office block in the heart of Brisbane for close to $300m to local funds house Quintessential Equity, just weeks after striking a joint-venture deal to build a new $500m tower in Perth with superannuation fund-backed Cbus Property. The group also believes that the top end of the office market will prevail even as lower-grade buildings fall in value.

There is even evidence in hard-pressed Sydney that the biggest office owners are willing to meet the market. The listed Dexus has won strong interest in the two towers it put on the block – 1 Margaret St and 44 Market St – with the discounts to book values expected to be kept tight.

And Mirvac and Blackstone are finalising the $820m sale of 60 Margaret St and the MetCentre retail complex, with the pricing showing around an 8 per cent discount to the valuation last June. Buyer Ashe Morgan is believed to be tying up financing for the transaction.

The discounts on the buildings are a far cry from stockmarket expectations of deep value falls in the portfolios of office companies and come as some of the best stock is yet to trade.

Chinese company Ping An Real Estate is progressing the sale of a half stake in the $2.4bn Sydney Place development at Circular Quay, with bidding showing that Australia is being differentiated from the recent US banking market volatility.

The Australian market differs from the northern hemisphere which has been struck by low office occupancy and, in the US, much higher use of leverage provided by alternative financiers.

On the ground, demand for space is holding up locally. A report released by Dexus showed that office space demand has been positive in the Melbourne, Brisbane, and Perth markets over the past quarter, while Sydney saw a contraction.

Office vacancy rates remain elevated, however net face rents have risen with Sydney CBD, North Sydney, Melbourne CBD, Brisbane CBD and Perth CBD showing positive quarter-on-quarter growth.

The report noted that real estate capitalisation rates are estimated to have lifted by about 25 basis points in the quarter but rising rents are helping support valuations.

“While interest rate rises are making for challenging conditions, there are signs that they are getting close to their peak,” Dexus head of research Peter Studley said.

“Despite volatility in pricing across all asset classes, there are reasons for investors to maintain or increase exposure to real assets, which include a steady defensive income return and a significant diversification benefit.”