Dexus strikes the Quintessential office deal as office markets reset

The climate is tough but the listed property giant has led the sales charge, with the buyer confident that the best offices will come back.

The sale of a major Sydney tower is being hailed as a breakthrough with listed property major Dexus offloading a building in the central business district to funds house Quintessential, which now plans to turn it around.

The $293m sale of 1 Margaret Street had been months in the making and came with an unconventional twist with Dexus pouring $50m into the Quintessential trust buying the building.

The sale is at a 16 per cent discount to its December book value, showing the difficulty in completing office sales in a harsh climate marked by high vacancies and incentives for tenants, amid concerns about lower quality assets.

It also showed a significant drop in the value on office towers, which Dexus has been taking as it meets the market and repositions at a time when many other landlords are trying to hold on, even in the face of rising interest rates.

But for Quintessential, it shows the group’s faith in the future of CBD offices even though the market is at a low point. It believes it can revamp the Sydney building and it is also in due diligence to buy a large Brisbane tower from Brookfield.

There have been very few city towers transactions this year due to a stand-off between sellers and buyers over pricing.

Mirvac said last week it was advancing the sales of two large buildings – 60 Margaret St in Sydney, which it co-owns with Blackstone, and 367 Collins St in Melbourne.

The deals could use similar structures with the vendor either providing guarantees or support to the buyers in order to get the deals over the line. More insight into the office market is expected when Charter Hall reports on Monday.

Quintessential will commit $90m to reposition the A-grade building. Picture: Mark Merton Photography

Quintessential will commit $90m to reposition the A-grade building and noted the tower is well positioned between the redeveloped Wynyard station and Barangaroo.

The firm is a specialist in redevelopments and will boost the finishes, amenities, and technology in the 18-level building, bringing it to a high A-Grade standard. Quintessential will create a 10,000sq m podium with large floor plates of about 1,850sq m, creating a campus style popular with hybrid working staff.

Work on the upper floors will commence in 2024, with the plant to be upgraded to create an all-electric building. The new podium will aim to be delivered into the market in 2026/27 when there is a void in new supply of A-grade space.

The overhaul will include a co-working facility providing flexible spaces for tenants and external users, adding to the existing co-working facility – another nod to changed work patterns

The sale was negotiated by CBRE’s Flint Davidson: James Parry, Andrew Hunter and Michael Andrews; and Adam Woodward and James Mitchell from Colliers.

“The opportunity to find value in secondary assets in Sydney that are capable of being repositioned to prime is gaining traction with capital off the back of some solid prime leasing data,” Mr Parry said.

Quintessential CIO Andrew Borger said the Margaret St block was excellent value with the prime quality asset trading at $14,240 per sq m with additional land at effectively no value. He said the firm planned to add about 4,000sq m of space.

“With recent inflationary pressure, new developments in Sydney will be challenging and repositioning key strategic assets is something we will see more of in the medium to long term and in a challenging market, we are pleased to have raised more than $200m of equity and a senior debt facility via the Commonwealth Bank of Australia,” he said.

Quintessential chair Shane Quinn said the group’s base and new investors had backed the counter-cyclical opportunity.

“We have waited a long time to be able to acquire quality assets such as this at such attractive pricing and below replacement cost. We think now is the time for creating inter-generational wealth and returns for investors at this point of the cycle,” he said.

“We think the market is overpricing risk in well-located A-Grade assets, which provides an opportunity for our investors to capitalise on. Comparatively B-Grade and secondary assets are struggling to attract tenants, which has not yet been reflected in pricing, so we think the market is mispricing this.”