Charter Hall to test Sydney office market with prime George St sale

Analysts believe the best buildings will hold up against falling values as commuter data shows that workers are coming back to the office.

The strength of the top end of the office market is to be tested again with the offer of a major complex in the heart of the Sydney CBD by property funds house Charter Hall, which believes that prime buildings will come through the crisis best.

Landlords are facing a cocktail of higher interest rates and weaker demand for space as big companies switch to hybrid working arrangements and trim space as the economy slows.

But the Charter Hall believes that the best buildings will hold up against the lower valuations that are now hitting even parts of the A-grade office market.

The sale of its complex at 333 George St is being handled off-market by agency Cushman & Wakefield after it received interest from buyers, and could sell for about $430m.

The building has 15 levels of A-Grade office space and counts WeWork as a major tenant. While it has not commented, the company has said that modern core assets will win bids around their book values, or at premiums. The two unlisted funds that own the asset are also well-capitalised.

Morningstar analyst Alexander Prineas said that Charter Hall funds were exposed to the office sector that faced near-term challenges. But he noted that Charter Hall office assets typically had long leases to strong tenants that should carry it through current weak conditions.

Morningstar also called out the recovery of activity in Sydney’s central business district, which it said “looks intact” according to train passenger data released by Transport for New South Wales. “This supports our view that rents for the major office REITs have bottomed and should see ongoing gradual recovery,” Mr Prineas said.

Morningstar warned that the impact of hybrid work would fall more heavily on B-grade and lower assets in suburban locations. The shift favours premium and A-grade buildings owned by the major REITs.

“These assets are more typically suited to hybrid working due to the large floor plates, installation of modern technology, and locations that are more attractive for both employers and employees,” Morningstar said.

The broader office market has been under pressure with values rerating after property group Dexus sold an ageing A-grade block at 44 Market St in Sydney for $393m. The price was a 17.2 per cent discount to its book value last December.

Analysts welcomed the sale and expect more listed property players to sell assets in order to cut debt.

“Further capital recycling is likely required to fund ambitions,” Macquarie said. “We believe the sale is a positive for asset valuations compared to what is implied in the share price.”

 In the case of Dexus more buildings are on the block. The company and its main wholesale vehicle have also put the NBN headquarters building in North Sydney up for sale and expect to reap more than $800m.

Dexus is also selling another tower in Margaret St in the Sydney CBD and analysts say the disposals will show that the listed market has overshot on concerns about a steep fall in office values.

The broker said the Dexus sale was the first major transaction to be confirmed and there were several other office towers in the market – including 60 Margaret St and 367 Collins St in Melbourne – which will provide a further guide on values.