Hines dials up interest in NBN headquarters as North Sydney takes off

The opening of the new metro station means deals are getting done in Sydney’s second CBD – but values have shifted.

The Lendlease Victoria Cross development in North Sydney.

US investment manager Hines is looking to put its stamp on North Sydney’s office market with the purchase of the skyscraper at 100 Mount Street for more than $600m.

The move on the tower, which is in its early stages, would lock in a rerating of Sydney’s ‘second city’ in the wake of the Victoria Cross Metro Station opening which has driven a surge of interest in the area.

The tower is owned by property company Dexus and its flagship wholesale fund, both of which have been selling assets, and a disposal would show that values of even premium assets have dropped.

But the deep falls that hit the office market amid the coronavirus crisis and interest rate hikes appear to be over, and Hines is betting that the premium grade office tower at 100 Mount Street will be attractive to tenants.

The complex has 35 levels of office space, with large floorplates up to 1,300sq m, and space may come up if the NBN departs for a new development underway by Lendlease in North Sydney, as is widely expected.

An artists' impression of the Victoria Cross Precinct. Picture: Supplied

The NBN leased almost half the Dexus building when it was developed, but since subleased a portion of that space to Hollard Insurance, improving the leasing profile. The tower is also occupied by Laing O’Rourke, who constructed the project.

The play by Hines is unlikely to be influenced by NBN’s tenancy – which runs until the end of 2026 – as the government-backed agency is understood to have already struck a heads of agreement to shift to Lendlease’s nearby underdevelopment Victoria Cross Tower.

That developer has been under pressure to attract tenants to the new building and is offering hefty incentives after an earlier tenancy deal mooted with WPP fell through. The NBN could even stay on in the Dexus building at a lower rent than moving to expensive new digs, though this is unlikely.

The Dexus block was put on the market in June last year and had been expected to reap $800m, but office values have been reset. Dexus had trimmed back the value of its stake to $322m at the end of June this year at a capitalisation rate of 6.1 per cent. Both the listed group and the Dexus Wholesale Property Fund are focused on recycling capital into higher returning opportunities, including new developments.

While sales of large office towers had been subdued, they are having a late year resurgence, with billions of dollars worth of deals being finalised as vendors adjust to the cooler market as interest rates are expected to stay high.

But global office buyers and local superannuation funds are back at the top end of city markets, punting more companies will demand space as their workers return to their desks. There is also more confidence in the market as buildings are trading at prices close to their written down book values, rather than falling much further.

The off-market deal on the Mount St tower is being handled by Knight Frank, but the real estate agency and parties have declined to comment.

Hines is emerging as one of the powerhouse buyers of this cycle as it teamed with local syndicator Haben in a $900m deal to buy Westpoint Shopping Centre in Sydney’s Blacktown.

North Sydney is being transformed by heavy foot traffic after the Metro’s entry, and Hines is counting on its rising attraction as a hub for businesses moving out of suburban markets and even from the CBD.

Hines is also betting that more office buildings in North Sydney will be converted to build-to-rent apartments or hotels. Chinese-backed Aqualand has two such schemes and another Asian player, Freecity, has proposed a huge mixed-use scheme on a Walker Street site that it bought from the GPT Group’s wholesale office fund.

The big shift towards residential in North Sydney means this is likely to be the focus of new development, as office buildings remain hard to stack up. With little new supply, Hines is now looking to capitalise on these shifts that could see high-quality existing towers swing back into favour.