Charter Hall aims high with Southern Cross Towers buy
Property funds group Charter Hall has shrugged off the chill winds rattling through the commercial property market, taking a half-interest in the $2bn Southern Cross Towers complex in Melbourne.
The move is part of a bigger push to boost its exposure to large-scale office precincts around the country, which it believes will attract top tenants as workers return to the office.
The Charter Hall Prime Office Fund took a half-stake in the landmark precinct in the “Paris End” of Melbourne’s CBD from Canada’s Brookfield and US private equity and real estate house Blackstone.
Sitting in the city’s tightly held eastern core at 111-121 Exhibition Street, the buildings are on a prominent corner with frontages to Exhibition, Little Collins and Bourke streets.
Southern Cross East and West Towers span a combined 126,000sq m of office space with large 2000-3000sq m floor plates. Both are fully leased to resilient government and corporate tenants, although Australia Post is shifting to another Charter Hall development by 2025.
The East Tower has almost 80,000sq m across 37 storeys, occupied by the Victorian government with a weighted average lease expiry of six years. The 20-storey West Tower comprises 45,000sq m, anchored by the postal service, which is shifting to inner-city Richmond, providing the chance to reposition that building for letting.
“The Southern Cross acquisition up-weights CPOF’s Melbourne CBD portfolio within the Paris End, enhancing our exposure to modern assets with government tenants, which have been two of the group’s strategic thematics that we continue to favour,” Charter Hall CEO David Harrison said.
“We are pleased to advance our relationships with two existing tenant customers, the Victorian government and Australia Post, as we grow our Melbourne office portfolio.”
Brookfield head of Australian real estate, Sophie Fallman, said the transaction demonstrated the quality of the Southern Cross Towers as well as the strength in the Melbourne office market. “High-quality office assets in key locations remain in high demand from tenants, retailers and investors alike,” she said.
Charter Hall Office CEO Carmel Hourigan said the Southern Cross precinct complemented CPOF’s portfolio of other large-scale assets, including the Wesley precinct, 555 Collins St in Melbourne CBD and Sydney’s iconic Chifley Square.
The purchase, undertaken by Charter Hall’s own wholesale funds rather than with the backing of a new capital partnership, will spur confidence in the top end of the office market.
The sector has been hit by both higher interest rates, which prompted a repricing of assets, and the sluggish recovery in office occupancy as coronavirus cases tick up. But the ability of Charter Hall to get the deal negotiated and finalised, while also pursuing other properties in Canberra and Perth, and buying on the Gold Coast, shows its model should be resilient in tougher conditions.
Charter Hall is focused on high-quality premium assets which are less likely to be affected by current market volatility. Greater risk surrounds secondary assets with shorter financing and lease terms in place.
The details of the transaction are yet to be fully disclosed, but the transaction negotiated by Cushman & Wakefield and CBRE showed a yield of about 4.5 per cent.
In April, Charter Hall emerged in prime position to buy the Southern Cross Towers complex for $2.1bn. At the time the group was preparing to work with Singapore sovereign fund GIC to snare the complex but that did not eventuate. The buildings were put on the block by Blackstone and Brookfield, with the entire complex briefly in play after the vendors initially offered a 75 per cent stake in the twin tower skyscraper.
The East Tower will now be split 25 per cent Brookfield, 25 per cent Blackstone and 50 per cent Charter Hall. Blackstone will exit the smaller West Tower, with Brookfield to stay in so it is split 50 per cent Brookfield and 50 per cent Charter Hall.