Office tower investors beating back pandemic blues as top towers trade

Some of the country’s largest investment groups are looking though the impact of the coronavirus crisis and getting set for a recovery

A tough period is expected in CBDs but investors are paying up for the best properties.

Corporate Australia has flagged a slow return back to offices around the county but major property developers and investors are already punting that the commercial market will come back strongly.

While occupancy levels have been constrained by pandemic-related restrictions, limits on transport and companies using more flexible work styles, property companies are striking deals that will position them for a recovery.

A tough period is expected in CBDs but investors are paying up for the best properties with agents reporting values are stabilising or even showing a premium in sought-after areas.

In one the biggest plays, the listed Dexus is poised to take full management control of a $1.2bn tower in the Sydney CBD with the support of a Singaporean investor that will take a one third stake in the complex at 1 Bligh Street.

More deals are being struck in the city with British group M&G and Lendlease’s APPF Commercial buying up stakes in other major buildings that were offered last year.

The transactions show that even as vacancy levels lift and rents are falling, investors are looking to place capital in Australian cities which remain among the most attractive in the world.

Savvy local buyers are also active. In Sydney, property houses EG Funds Management and Quintessential Equities are chasing deals in suburban locations.

In Brisbane, local player Marquette Properties is also busy and is in an exclusive position on the city’s well-known Gold Tower in the CBD, which it could pick up for about $290m.

Marquette targets strategic assets in Queensland and is in talks to buy the building from a Dexus-managed partnership. The investment group is now raising funds to back the purchase.

Dexus and its Canadian fund partner are selling the 32 level A-grade building that sits in the heart of the city’s Golden Triangle and will benefit from infrastructure upgrades.

Justin Bond of Knight Frank and Anthony Ott and Mr Azar of Savills are handling the sale but declined to comment as did the parties.

The Sydney deals in particular show that offshore players are prepared to pay for local assets that would otherwise not be for sale.

The slice of the Bligh Street tower is being offloaded by industry powerhouse Cbus Property which is pouring funds into new developments, including apartments above the former David Jones menswear building in Sydney.

The Bligh Street tower is anchored by law firm Clayton Utz and other blue-chip tenants and the asset drew strong bidding, including from a Lendlease-run fund.

Dexus and its wholesale fund, DWPF, co-own the building and were keen to take control after a process run via Josh Cullen and Rick Butler of Cushman & Wakefield and Ian Hetherington and Ben Azar of Savills but they did not comment.

The tower has 27 levels of premium grade, six-star Green Star-rated office space. It features 1600sq m floors and configurations suitable for social distancing.

The impending purchase by Mercatus, the Singapore company linked to the deal, is yet to be inked. But once finalised it would shows faith that incentives will be reined in once vacancies related to the pandemic are filled up.

UBS analysts said CBD office markets will make some steps back to normal in 2021 but warned that lower grade offices could come under pressure.

“We expect utilisation to increases but a structural increase in vacancy for secondary assets will highlight the new norm. A vaccine led recovery bodes well for CBDs albeit leasing markets are likely to remain subdued as large corporates re-evaluate real estate needs,” the analysts said.

They expect to see the largest divergence between prime and secondary offices in the past 25 years driven by opportunistic tenants upgrading to better space.

But they pointed to the robustness of the direct market even though many deals involved co-owners boosting their stakes, as they showed capital was willing to absorb near-term income weakness.