Centuria Office REIT makes $273m bet fringe market recovery

Centuria Office has bought the office building at 101 Moray Street, South Melbourne for $205.1m from the wealthy Deague family.

Deal-making in suburban office markets is picking up as investors chase alternatives to locked down central business district towers that could take the longest to recover.

Big city buildings have been deserted by workers during lockdowns and Melbourne, in particular, has been slow to recover and investors are looking to city fringe and suburban markets for alternatives.

In the latest deal, ASX-listed Centuria Office REIT has acquired two high-quality offices in key near-city and metropolitan Melbourne and Sydney markets for a total price of $273.1m.

It is also tapping equity markets to partially fund the acquisitions, and is undertaking a fully underwritten one for 6.4 accelerated non-renounceable entitlement offer to raise $201m via MA Financial and Morgan Stanley.

Fund manager Grant Nichols is a strong believer in city fringe and suburban office markets.

The trust’s portfolio focuses on metropolitan and near-city office markets that provide excellent worker commutability via good public transport nodes and road arterials.

“These have been better performing office markets throughout the past 12 months, attracting occupiers seeking shorter travel time to and from work at affordable rents,” Mr Nichols said.

Mr Nichols believes that newer buildings will also perform well as workers demand higher quality space in order to return to the office.

“These high-quality, modern office acquisitions are strongly aligned with the trust’s strategy and deliver benefits including broader geographic diversification, high occupancy, an enhanced portfolio lease expiry and, being young assets, limited capital expenditure requirements,“ he said.

The acquisitions increased the trust’s portfolio value by about 14 per cent to $2.3bn and have improved its averaged lease term to 4.5-years and boosted occupancy to 93.7 per cent.

The trust bought 101 Moray Street, South Melbourne for $205.1m on a 5 per cent capitalisation rate from the wealthy Deague family.

The new building is fully occupied and Its near-city location has become a desirable area for Melbourne tenants, particularly within the technology and media sectors.

The trust is also acquiring the remaining half interest in 203 Pacific Highway, St Leonards, Sydney, for $68m on a 5.75 per cent capitalisation rate.

The building is 99.3 per cent occupied with a 3.9-year lease term. The REIT already owns a half interest in the complex and exercised its pre-emptive right after the co-owner issued a transfer notice.

The purchases increase the trust’s portfolio value by 14 per cent to $2.3bn while improving its lease term and occupancy levels.

The deal making shows the pick up in suburban office property even though lockdowns apply in Sydney and Melbourne.

The building adjoins another fund asset, 201 Pacific Highway. Both properties sit in the heart of the St Leonards’ business precinct, directly above the entrance to the railway station.

The acquisitions and equity raise consolidate COF’s position as Australia’s largest listed pure-play office REIT.