David Jones in talks with Charter Hall

In the most significant property deal since coronavirus struck, Charter Hall is in exclusive talks for David Jones’ Sydney site.

David Jones’ parent company has entered exclusive talks with Charter Hall. Picture: Carla Gottgens/Bloomberg

In one of the most significant property deals since the coronavirus crisis struck David Jones parent company, Woolworths Holdings, has gone into exclusive talks with property firm Charter Hall about the sale of its Elizabeth Street site in the Sydney CBD.

The deal, likely to be finalised at more than $500m, comes as part of the retailer’s review of the capital structure of its Australasian entities amid tough trading conditions, which extended to conducting a full review of options for the blue chip David Jones property portfolio.

This included the David Jones Elizabeth Street and David Jones Bourke Street Mall, which now will likely be dealt with at a later date, as the sales process via investment bank UBS, first focused on the Sydney asset.

Once finalised, the transaction will help set a benchmark for city retail property as the sector seeks to recover from deep falls in traffic, with neighbouring Westfield Sydney also suffering.

For Charter Hall the purchase would be in keeping with its focus on long-term sale and leaseback properties and the company has already struck about $8.5bn of such deals over the last decade. Longer term, it also gives the company a Sydney CBD site that can accommodate a major redevelopment.

The property also drew stiff competition from Shaun Bonett’s Precision Group and fund manager Ashe Morgan, as well as interest from investor Victor Comino.

David Jones had weighed holding the two prized properties housing its flagship stores and has now given itself longer to work out how to handle the Melbourne asset where both its performance and ability to sell have been hampered.

Although David Jones has been hit by the retail slowdown its operations have been supported by owning the properties. David Jones earlier this year hired KordaMentha to advice on debt and real estate strategies.

Woolworths Holdings in July also sold the David Jones menswear store on Melbourne’s famed Bourke Street mall to funds manager Newmark Capital for $121m.

Scentre Group and Cbus Property also teamed to buy the David Jones Market Street building in Sydney‘s CBD for $360m in 2016 and are overhauling the complex.

The Elizabeth Street sale was struck at the higher end of expectations after the complex was tipped to sell for $400m to $500m.

If the properties traded as a pair they could have gone for at least $700m and David Jones will be negotiating to ensure rents it pays in Sydney support its recovery from the crisis.

Woolworths Holdings appointed Scott Fyfe as chief executive of the department store earlier this week. He ran Woolworths Holdings’ Country Road Group for four years, replacing interim boss Ian Moir, who led the $2.1bn takeover of David Jones in 2014.

The vendor said it has engaged with a number of “high quality” parties in relation to the acquisition of the David Jones Elizabeth Street property before determining the sale process would be “optimised” by entering into a period of exclusivity with a preferred partner.

“Accordingly, the Company has agreed to enter into a period of exclusivity with Charter Hall Group, on behalf of a Charter Hall managed partnership, in relation to the sale of the David Jones Elizabeth Street property,” it said.

Charter Hall has emerged as one of the country‘s most aggressive deal-makers during the crisis and also picked up a portfolio of warehouses occupied by Germany’s Aldi and it has snagged pre-commitments for major buildings in Adelaide and Melbourne.

The vendor cautioned that discussions with Charter Hall were “ongoing and remain incomplete” and said the deal required confirmatory due diligence, negotiation of definitive agreements and third party approvals.

It added that it had elected to focus on realising an outcome on the Elizabeth Street property in the near term, adding that options in relation to the David Jones Bourke Street Mall property “may be revisited in due course”.