David Jones Melbourne building selling as Woolworths Holdings banks on bricks and mortar

The landmark David Jones building in Bourke Street, Melbourne is being sold by South African retailer Woolworths Holdings, ending its costly move into the department store chain.

The David Jones store in Bourke Street Mall, Melbourne. Picture: Aaron Francis

The landmark David Jones building in Bourke Street, Melbourne is being sold by South African retailer Woolworths Holdings, marking the end of its costly move to buy the department store chain for $2.1bn in 2014.

The company endured a tough decade in which once venerated department stores struggled to retain customers as online retailing undercut their operations, and in late 2022 it sold the retail business to private equity firm Anchorage Capital Partners for about $100m.

Woolworths kept the popular Melbourne property as part of the deal and has now agreed terms to sell it to funds house IP Generation for $223.5m, highlighting the safety of investing in bricks and mortar even in tough times.

The forthcoming deal also harks back to the sale of the nearby Myer Melbourne building three years ago. That equally well-known complex was bought by Charter Hall’s listed long lease property trust and Abacus, with the pair swooping on a two-thirds stake in the Bourke Street building in a $270m deal.

That also showed the resilience of property assets, with the stake in the flagship property sold for close to the then stockmarket value of retailer Myer. The company’s shares have since recovered, and David Jones is also performing again under its new private equity owners, which are pumping capital into its turnaround.

The transaction will also be a shot in the arm for investment in Melbourne, which has been weighed down by negative sentiment due to high taxation and foreign investors cooling on the city.

But IP Generation is one of a group of syndicators that have swooped on opportunities in the recovering retail property market, ahead of big institutions getting back into the area at strength.

While the big bet that Woolworths made on Australia’s department stores soured, partly by consumers switching away from the all-in-one concept, and further worsened by the pandemic, it was partly saved by the chain’s property holdings.

Woolworths sold off major David Jones properties in Sydney and Melbourne, partly in order to reinvest in its operations, but it also realised top dollar for them.

Woolworths sold the David Jones Elizabeth Street site in Sydney to Charter Hall for $510m in 2020 as it reviewed the capital structure of its Australasian entities amid tough trading.

That review also included the David Jones Bourke Street Mall that is now in the process of selling via an off-market process handled by JLL’s Nick Willis and Sam Hatcher. They and the parties declined to comment.

Woolworths that year also sold the David Jones menswear store, also on Melbourne’s Bourke Street mall, to funds manager Newmarket Capital in a $121m deal, and it is revamping that building with new tenants.

For IP Generation, the purchase would mark a move into city retail after it picked up a series of shopping centres around the country that have been offloaded by larger real estate companies caught out by big falls in retail property values,

The manager is billing its latest trust as the IPG Special Situations Income Fund, and it is also buying a stake in another Melbourne shopping centre in suburban Cranbourne. Both represent breakthrough deals as top-quality retail assets rarely trade in Melbourne, partly as private groups still hold a big sway in the city.

IP Generation noted the value that was still on offer at this time of the cycle, with the property yields that the transactions were struck on “significantly above” the normal levels, giving it the chance to generate strong returns.

The David Jones building is trading in line with this shift and the stake in the Cranbourne centre, which is being sold by funds house ISPT for $126.5m, would show a fully leased acquisition yield of 8.5 per cent.

The Cranbourne asset sale is being handled by agencies JLL and Stonebridge. They declined to comment.

The transactions would take IP Generation past $2bn of assets and position the team including property veterans David Blight and Greg Miles, alongside CEO Chris Lock, for further expansion.

The David Jones building carries an 18-year lease to David Jones, showing how vital it is to Anchorage’s plans.

The group has already sought to revamp the Melbourne city building via a six-floor redesign bringing together the best of fashion, home and beauty under one roof. It now offers an “immersive experience” carrying luxury beauty brands ranging from Giorgio Armani to Lancôme and Gucci.

The store also carries exclusive brands such as Anastasia Beverly Hills and Rationale, as well as treatment rooms from Rationale, Ella Baché and Dermalogica.