Quay deal: City venture shows the way for top towers
The drought in big tower deals is over as trading begins but only the best stock is selling.
The top end of the office market has been bolstered by industry super fund-backed Cbus Property striking a venture to join Canadian giant Brookfield in developing a $500m premium tower at Perth’s Elizabeth Quay.
The under-construction tower will join the Brookfield developed Chevron headquarters next door, with the buildings rounding out the main office projects in the waterfront precinct and also breaking the drought of major commercial deals.
The market has been awaiting a transaction that would help establish there is demand from big capital for premium offices, and the news that local superannuation funds are now in the buying ranks will support the market.
The value of office towers has come under pressure with listed landlords marked down by share market investors due to concerns about valuations and rising capitalisation rates, but the deal shows that top stock remains in demand.
The move by Cbus Property continues its strategy of investing through property cycles, and it is also developing a tower in Brisbane and has a major scheme in Melbourne.
Brookfield is one of the largest office players in the world, and the transaction shows that Australian offices will hold up despite the chill winds hitting the sector in the Northern Hemisphere.
Both Brookfield and Cbus Property groups cited the attractive dynamics of the Perth office market, where premium vacancy levels are still very tight and the economy is benefiting from the hot resources economy sector.
The city’s office market is also less exposed to the job cuts in finance and technology which have hit the eastern seaboard.
The deal alone will not quell concerns about the office market but will provide comfort to landlords, who have insisted that there is a flight to quality in which the best towers are winning tenants even as lower grade buildings struggle.
Both private players and listed real estate investment trusts have put forward ambitious office developments, and the transaction shows the best will get off the ground even after delays due to the economic slowdown.
Cushman & Wakefield’s Josh Cullen and Mark Hansen and CBRE’s Aaron Desange and Flint Davidson advised Brookfield on the partnership deal.
Under the terms, Brookfield and Cbus Property will partner in a joint venture to develop Nine The Esplanade in Perth’s Elizabeth Quay mixed-use development precinct. It is their second venture, after their partnership on the Classic East Melbourne residential development in Victoria.
The Elizabeth Quay lot, which was secured by Brookfield from the WA government, will house a 19-level premium grade office tower and span more than 33,000sq m. It will sport large floor plates averaging 1870sq m and tenants have uninterrupted river views, state-of-the-art end-of-trip facilities, and good transport links.
Cbus Property chief executive Adrian Pozzo said the Elizabeth Quay project was an “invaluable opportunity” to re-enter the Perth office market after the developer’s success with 140 William St ten years ago.
“It is great to be back,” Mr Pozzo said. “In recognising the prime location of the site in the heart of the landmark Elizabeth Quay precinct … we seized the opportunity to partner with Brookfield to deliver another industry-leading commercial office building for Perth.”
The property will be slotted into Cbus Property’s $6bn carbon-neutral office portfolio across Australia, which ranks in the top tier nationally.
The developer has been active. Last year, it acquired the remaining 50 per cent stake in 205 North Quay, a $660m Brisbane CBD office tower now under construction. And in Melbourne it has a $1bn office scheme at 435 Bourke St.
It is bullish about offices.
“I think people will come back to the office if it’s a real state of the art new 6-Star Green Star building,” Mr Pozzo said.
Nine The Esplanade is targeting a 6-Star Green Star rating, a 5.5 star NABERS Energy rating and IWBI WELL Gold Core certification. Early site works kicked off last year and the building is expected to finish in 2025.
Mr Pozzo is not worried about the potential for office values to fall, and expects them to correct “somewhat” in the coming round. “We’re a long-term investor in property – there’s always cycles,” he said.
He said top tenants were chasing premium space after adjusting to hybrid working styles. They were going from B-grade to A-grade buildings but taking up less space. “They are upgrading their office requirements,” he said.
Brookfield's head of real estate in Australia, Sophie Fallman, said Perth was experiencing the strongest market conditions since the 2011 resources boom.
“The global flight-to-quality thematic for real estate is playing out in the Perth office sector, resulting in strong demand for highly sustainable and amenitised premium grade assets,” she said.
Ms Fallman said the prime development was a “ringing endorsement” of Perth, where the supply fundamentals are the best they had been for some time. She cited “enormous” demand for premium office space in Perth, with vacancy at 6.6 per cent, against the broader office market’s 16 per cent.
Brookfield has filled up the just completed Chevron headquarters at One The Esplanade, which she said underscored the strength of demand for space.
The tower being developed with Cbus Property is about one-third pre-committed, and the developers expect to capitalise on the strong leasing conditions at the prime end of Perth’s market.
“Office is doing very well both from an occupancy demand perspective and, we therefore also believe, in a capital sense too,” Ms Fallman said.
There has been a dearth of big office sales, but the developers are banking on a wave of tenants wanting to attract workers back to buildings, and Perth already sports the country’s highest office usage.
“This is a leasing play because we can see really good fundamentals in the broader economy and the leasing market,” Ms Fallman said.
“We really see a great window of opportunity to capitalise on the strong demand in the Perth market.”
Until more buildings are sold, analysts are still warning about tough times ahead for the broader office market, which includes older stock which is becoming redundant.
Citi analysts Howard Penny, Suraj Nebhani, and Akshit Batra expect there will be weaker fundamentals for offices, given higher overall vacancies and excess supply, and a period of weaker demand ahead.
Share market investors have gone cold on office stocks and the Citi analysts said the overall market was dealing with elevated vacancy and lease incentives.
Investors polled by Citi expect offices to be at greatest risk of market evidence of higher capitalisation rates. The big shifts in these metrics are yet to come, but the deal in the West Australian capital could point the way.
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