Blackstone snaps up Scentre’s office towers in $1.5bn deal

US private equity giant Blackstone snaps up Scentre’s office towers in $1.5bn deal.

Blackstone has bought the office towers above Westfield Sydney from Scentre Group.

US private equity giant Blackstone Group has swooped on the office towers above Westfield Sydney for $1.52 billion, marking one of the city’s largest-ever property purchases as commercial values approach a peak in this cycle.

The prices of skyscrapers have soared on the back of rising rentals, constrained supply and a surge of fresh equity and cheap debt pouring into the real estate sector as investors chase hard assets that produce steady yields.

Scentre, the owner of Westfield shopping centres across Australasia, ran an off-market process to sell the trio of towers to Blackstone, but will keep the luxury retail property, which it has expanded by purchasing the David Jones building in Sydney’s Market Street that it is now redeveloping.

The towers deal, revealed by The Australian this month, comes as real estate investment trusts have raised about $3.5bn, in the largest equity calls in the sector after the global financial crisis.

A tide of local groups is edging out the international money that often holds sway in the office market, although Scentre’s sale to Blackstone bucks the trend that has seen the local Dexus and Charter Hall operations strike major office purchases.

Scentre also announced an $800 million share buyback on the back of the sale, as well as last month’s disposal of a half-stake in Westfield Burwood in Sydney to the Perron Group.

Scentre chief executive Peter Allen said the group had now released $2.1bn of capital to further pursue “our strategic objectives, creating long-term value for securityholders”.

The group is seeking to combat slowing retail sales growth by transforming some of its best centres into mixed use assets, including more offices and even residential elements, as well as boosting their leisure components.

“Our development of the Sydney office towers in 2011 and ongoing investment until now has created significant value for security holders,” Mr Allen said.

“The transaction price represents almost $800m in additional value created compared to our investment cost and has generated an unlevered internal rate of return of over 16 per cent per annum for the group,” he said.

The disposal includes a 299-year leasehold interest to Blackstone over the offices at 100 Market Street, and 77 and 85 Castlereagh Street, with Scentre keeping Westfield Sydney and Sydney Tower.

SG Hiscock & Company portfolio manager Grant Berry praised Scentre’s sale of the towers in order to free up capital and address market concerns about its leverage, and also giving it the ability to buy back its securities at a discount.

Mr Berry noted that purchases of local office towers had been dominated by local real estate investment trusts this year, which had been beating even offshore capital, with recent buyers including listed groups Cromwell and Growthpoint.

“It might take a retail REIT to act on the high point in the office market cycle,” Mr Berry said. “We’re 10 years on from the GFC and we are in an environment where capitalisation rates are beyond previous peaks for what are cyclical assets.”

Scentre held the office towers at 4.95 per cent capitalisation rate and the sale reflected a premium to book value of more than 10 per cent.

While office towers and logistics centres used by e-commerce giants to deliver goods are in hot demand, sales of shopping centres have stalled, with broker Citi estimating $11bn worth of unsold centres are on the market, putting values in the sector under pressure as deals are tough to complete.

Scentre’s malls are among the best in the country but the retail sector is on edge as a half stake in the $1.5bn Westfield Marion in South Australia is being offered by Lendlease’s main retail property fund.

Scentre would use the sale proceeds into repaying debt, but has kept its forecast dividends for this financial year unchanged at 22.6c per share as it spruiked its capacity in the office sector, where it has further projects on the drawing board.

Credit Suisse analysts Andrew Dodds and Daniel Downes said they saw merit in the deal as it took advantage of “top of the cycle” office values to deleverage and provide sound balance sheet flexibility to pursue capital initiatives.

“The transaction should help alleviate investor concerns around the balance sheet and Scentre’s ability to fund its future development pipeline,” the pair said.