China Investment Corporation snaps up half stake in $1.85bn Grosvenor Place

China’s sovereign wealth fund has just reset the market for Australian office towers in the biggest deal of the year.

The Seidler-designed Grosvenor Place building is a landmark among Sydney office towers.

China’s sovereign wealth fund has boosted its stake in Sydney’s landmark $1.85bn Grosvenor Place by purchasing a half interest in the tower in a move expected to spark a flurry of deal-making across major central business districts.

The building interest was sold by listed companies Dexus and partner Canada‘s CPP Investment Board at a discount of about 5 per cent to book value, reflecting the impact of the coronavirus crisis.

The fall is in keeping with expectations the country’s best towers will suffer a dip in value but avoid the cataclysm initially feared when the pandemic broke out in Australian cities.

The sale, brokered by CBRE and JLL, to the China Investment Corporation is yet to be approved by the Foreign Investment Review Board and comes amid political tensions with China over trade and security.

Other building sales to Chinese parties are yet to win FIRB approval but the office asset is not viewed as controversial partly because the Chinese sovereign fund already owns a quarter stake in the building.

The deal was flagged by The Australian in September when CIC edged out rivals in the contest for the interest in the tower, in a sign that international players would back the recovery of Australia’s office markets.

The sovereign fund picked up its initial interest when it bought the Investa office portfolio for about $2.5bn in 2015 and handed management of some buildings to Mirvac. It also holds other passive property investments.

Dexus put the stake in the prime Sydney tower on the block in July and the deal effectively set a benchmark for more transactions to follow.

Deal-making on high-quality office towers is picking up as corporate Australia gets back to work and buyers are targeting premium assets that are on the block in the wake of the coronavirus crisis.

While the disruption is ripping through the lower end of the market, the top buildings in Australia are garnering strong interest from buyers keen for an exposure to an expected recovery once the office market comes through the current dip.

Sydney is Australia’s gateway city and has taken a hit as international tourism ground to a halt. Business has been hampered as top firms have yet to call back all their workers and some will cut back space as the recession bites.

However, the global pension funds that set the pace for commercial real estate valuations bid heavily on the Grosvenor Place half interest, betting Sydney would be one of the first cities to come out of the downturn.

CIC’s confidence in the market is on display as it will face some vacancy, as anchor tenant Deloitte departs for a new tower owned being developed by AMP Capital.

The listed Dexus has economic interest of 37.5 per cent, with the Canadian group at 12.5 per cent. The tower will now be three-quarters owned by CIC, advised by Mirvac, and funds manager Arcadia, which manages for an unlisted trust, holding a one quarter interest.

The sale will realise total net proceeds of $925m for the half stake and the listed company will reap $694m, with the discount attributed to current vacancy and short term leasing risks.

The George Street skyscraper sits on a major site adjoining Circular Quay, in the northern part of the Sydney CBD, and the complex has 44 levels of prime office space.

CBRE’s Flint Davidson, Simon Rooney and Stuart McCann and JLL’s Rob Sewell, Luke Billiau and Simon Story brokered the Grosvenor deal, which was chased by rival pension funds.

CBRE agent Flint Davidson said offshore investors had a positive view of Sydney and cited historically low financing costs, low vacancy levels and the resilient economy.

CBRE’s Mr Rooney said the transaction was one of the most competitive office deals to occur globally in 2020 and “demonstrates the strong underlying investor appetite, particularly from foreign capital for gateway cities”.

JLL’s Mr Billiau said it marked one of the largest office deals on record and will be seen regionally as a vote of confidence for the Australian capital markets.

The sale follows $803m of recent property sales made by Dexus, which have mainly been at or above book value.

Grosvenor Place is 89 per cent occupied but has an weighted average lease expiry of 3.4 years. Dexus said the building has given it an annualised return of about 12 per cent since it bought into the tower in 2013.

The company has not had property management control of the asset, limiting its ability to influence the building, and Mirvac will now hold greater sway.

Dexus chief investment officer, Ross Du Vernet, said the sale strengthened the company’s balance sheet and enabled it to fund higher return growth initiatives in its funds and development businesses.