Lendlease’s Metro station project has lures significant overseas interest

The local developer, which has a market value of $4.81bn, is looking to bring its longtime Japanese partner into a premium Sydney tower.

Development major Lendlease has secured strong interest in its $1.5bn Victoria Cross over-station development in North Sydney, with Japanese real estate developer Mitsubishi Estate poised to take a slice of the project.

The move would support both the listed company, which is sticking to its ambitious urban regeneration plans in global capitals amid fears of a slowdown, and the premium end of the office market, where deals are still getting done.

The Australian developer is in talks with Mitsubishi Estates Asia, with which it has substantial existing ties, about the Japanese company taking a 25 per cent interest in the landmark development.

The building is at the vanguard of a North Sydney office development wave, giving it a crucial advantage in the still-tough environment for new projects.

The over-station office building and retail complex will be the first premium complex to market in the area as tenants look to capitalise on the new metro station opening up, and it is expected to follow the model of other successful station projects.

While the deal’s metrics are yet to be finalised, the transaction could have a yield reflecting a sub-5 per cent rate, showing confidence in top new offices that meet the requirements of global investors.

Lendlease kicked off a process seeking partners for the huge site last September, tapping real ­estate agents Ben Schubert and Tyler Talbot of Knight Frank and Luke Billiau of JLL to find partners that would own ­a stake in the planned skyscraper above the forthcoming station.

The developer and agents declined to comment. Lendlease sold a 25 per cent portion of the project to its own unlisted APPF Commercial fund in 2019 and has bolstered its funds tie-ups to get big projects going.

It is using the same model as its Circular Quay project, Sydney Place, where the Salesforce Tower has become the city’s tallest office block at 55 storeys. That project is a joint venture with China’s Ping An Real Estate – which is selling its stake – with Mitsubishi Estate Asia also investing.

Construction has begun on Lendlease's premium commercial tower above the upcoming Victoria Cross Metro Station in North Sydney.

Large institutions are chasing the best towers as tenants return to offices in the wake of the coronavirus crisis and seek out next-generation environmental features.

Developers have emphasised that this premium echelon of buildings will perform even though lower-grade offices are weighed down by high vacancy rates, partly prompted by a flight to quality towers.

North Sydney’s office boom has drawn in almost all major listed developers and a series of high-profile private players, and they are positioning to get their schemes off the ground.

Lendlease should complete the Victoria Cross project by mid-2024, giving it an edge over rivals who must deal with escalating construction costs and the difficulty of winning large precommitments.

Building is under way on the flagship 42-storey tower, which is billed as having the latest in workplace experiences and sustainable space.

It will have net-zero carbon emissions, powered entirely by renewable energy, and is targeting a Platinum WELL and 6-Star Green Star rating.

Designed by Bates Smart, the premium-grade building will have a multipurpose hub space and green spaces to promote health and wellbeing.

On the ground level, the lobby will flow into a laneway where more than 20 new retail and hospitality outlets are planned.

The complex will house up to 7000 workers in about 58,000sq m of space.

The play comes as other top class offices show their value.

The first round of bidding has closed for a half-stake in the $2.4bn Sydney Place, in a process being handled by Cushman & Wakefield and Savills, which is also bringing bidders chasing premium assets.

US private equity house Blackstone is also selling the JPMorgan headquarters above Westfield Sydney, with expectations of about $1bn, via JLL and CBRE.

Finance house Ashe Morgan and a Japanese partner are also tying up a $830m deal to acquire 60 Margaret St and the MetCentre from the listed Mirvac and private equity house Blackstone, showing that value-add deals are also winning capital.

Australian office values have held up even as Northern Hemisphere offices have dropped in value, partly thanks to the outlook for the economy and rental growth.

Lendlease’s local operation is also making strides amid tough times for its global business, and many of its deals have been backed by Mitsubishi Estate.

Early moves include partnering on the One Sydney Harbour, at the residential towers at Barangaroo, and Melbourne Quarter’s residential East Tower.

Last August, the pair snapped up the One Circular Quay project in Sydney, buying the controversial site from Chinese investment house AWH for $850m, ending years of uncertainty.

They are now building $3.1bn twin apartment and hotel towers on the former Gold Fields House site at Circular Quay.

Mitsubishi Estate held a 19.9 per cent interest in that venture and can take it up to a two-thirds interest. Their purchase was quickly followed by the sale of the under-construction Waldorf Astoria hotel to tycoon Andrew Forrest and high-price apartment sales.

The model appears to be working in Australia, but overseas the pressures remain. In February, Lendlease turned in a $141m interim loss after being hit by a $200m provision due to retrospective action by British government action over residential building standards.

The company has insisted it is on track to develop $8bn worth of projects annually, but the loss put pressure on the operation, which is also dealing with slow Australian housing sales.

But investors worried about the company’s balance sheet could take comfort from it taking a partner on the North Sydney tower.

Lendlease said last month that its core operating earnings were expected to improve in the second half of the financial year, but current market risks, including inflation and interest rates, continued to “temper” the pace of recovery.