Charter Hall fund struck by office market woes

An unlisted Charter Hall fund may not meet redemption requests until next year due to tough conditions in the office market.

.In Perth, the PFA Fund and the listed Charter Hall Long WALE REIT offered the former Optima Centre for about $140m.

Property group Charter Hall has blamed tough conditions in the office market for delays as it meets redemption requests in a $2.5bn unlisted office fund focused on government buildings.

The market has been rocked by multiple interest rate hikes just as big landlords are attempting to offload billions of dollars worth of towers and buyers are increasingly wary about the shift to hybrid working.

Charter Hall has held the line and has not taken heavy write downs on its assets, arguing that high-grade towers will benefit from a flight to quality buildings by corporate Australia.

But the Charter Hall Direct PFA Fund has now flagged that it may pay out a portion of redemption requests made in late 2022 as part of a five year liquidity window next year.

The trust met about 25 per cent of the redemption requests by selling a stake in a western Sydney property earlier this year but delays have hit the remaining 75 per cent portion of redemption requests.

Charter Hall last year gave investors the opportunity to redeem units in PFA via its scheduled five yearly liquidity event. In January it said that after considering the economic environment liquidity would be delivered in tranches during 2023.

The fund manager said more than 80 per cent of equity elected to remain invested in the trust and it quickly sold a 49.9 per cent interest in the Westmead IQ in western Sydney, with more assets identified for sale.

The fund put buildings on the market in Perth and Adelaide but has yet to strike deals to sell them. In Perth, the PFA Fund and the listed Charter Hall Long WALE REIT offered the former Optima Centre for about $140m. The PFA Fund also put a $100m office tower in the Adelaide CBD on the corner of King William and Waymouth streets on the block.

Office leasing is holding up in the fund’s government-occupied buildings. At the end of March, the portfolio had 99 per cent occupancy and carried a weighted average lease expiry of 6.2 years. The fund is weighted to government tenants, which account for more than 60 per cent of portfolio income, and it also invests in major developments like 60 King William St in Adelaide.

121 King William St, Adelaide.

The delay in meeting redemptions is a sign of the falling values in the office market also striking at higher quality assets.

The group’s direct funds typically take up to 12 months to fund liquidity windows and the PFA Fund had returned more than 10 per cent annually since inception.

Charter Hall said it had been focused on providing liquidity to investors that chose to redeem, having regard to the current economic conditions. “However, this Liquidity Event has been impacted by challenging economic and property market conditions,” it told investors.

Charter Hall said it had marketed a number of properties for sale, in order to satisfy the remaining 75 per cent of redemption requests. “However, we will only sell assets for prices that reflect fair value and given the lower sales volumes in the office investment markets, sales have proved challenging,” it said.

Charter Hall said a portion of the remaining redemption payment may be delayed into the first half of 2024. “We will continue to work hard to provide liquidity to investors that elected to redeem and manage the fund in the best interests of all investors,” it said.

Listed REITS are trading at discounts - often at around 25 per cent to their asset backing - but unlisted vehicles are billed as offering more certainty and the potential to hold assets until markets stabilise.