Middle East fund ADIA strikes deal with Charter Hall to exit Sydney office precinct

Charter Hall has become joint owner of one of SYdney’s largest office development sites at 1 O’Connell Street. Picture: Knight Frank

Property funds manager Charter Hall is expected to put its stamp on the O’Connell Street precinct after picking up a half interest in the collection of buildings in the heart of Sydney from a Middle Eastern sovereign fund for more than $500m.

The sale by the Abu Dhabi Investment Authority has just been finalised, and sees Charter Hall become joint owner of one of Sydney’s largest office development sites alongside a Lendlease fund, giving it sway over its future.

The O’Connell precinct is an amalgamation anchored by the iconic 1 O’Connell Street premium office tower, and it includes a series of smaller buildings. The five separate assets occupy a combined freehold site area of 6,177sq m.

Lendlease and its Middle Eastern fund partner in 2024 proposed a 309.2m building with 72 storeys on the block on O’Connell St. It is bounded by O’Connell, Bent and Spring streets.

Lendlease’s Australian Prime Property Fund Commercial, which controls most of the remaining interests in the precinct, held the rights to match Charter Hall’s offer for the ADIA interest but waived its pre-emptive rights.

Industry players believe that it may also be willing to exit its own interest in the precinct, if the price is right, after working to get the initial scheme off the ground.

The proposal for a super-tall tower is less likely to go ahead now that Charter Hall has bought an initial half stake in the precinct.

While the incoming purchaser is keen to exploit the site’s long-term potential, it could also look to improve the leasing profile and undertake less dramatic repositioning of the existing buildings.

Lendlease’s planned O’Connell St site.

Longer term, it may also favour a more commercially viable scheme involving smaller premium buildings, rather than developing a single super-tall tower, which would depend on winning a huge precommitment at a time when few large corporations are in the market.

Charter Hall has picked the development cycle well with its Chifley South complex in Sydney’s CBD winning tenants as the premium end of the market tightens up.

Lendlease is also focused on a proposal that will see it develop an office tower above the new Metro station on the corner of George and Hunter streets in Sydney’s CBD.

CBRE’s Flint Davidson, Stuart McCann and James Parry, and JLL’s Luke Billiau, Kate Low and Verity Wyatt-Budd marketed the property but they and the parties declined to comment.

The Lendlease fund’s move to pass on buying the $500m stake comes as its funds management empire remains under pressure.

The company last year saw off a challenge driven by superannuation funds Hostplus and Unisuper that would have seen Mirvac installed as manager across the $10bn APPF empire. However, the battle hardened divisions among the company’s superannuation fund backers.

The Lendlease-run APPF Retail fund is being wound up after almost its entire register of investors voted to exit, with the remaining $2.4bn assets expected to come to market.

Rising shopping centre magnate Chris Garnaut last month finalised a deal to buy the Erina Fair shopping centre in regional NSW from the fund and South Korea’s NPS for $895m.

Lendlease kept control of the $5.8bn office fund after seeing off Mirvac but it remains under pressure from that group of investors.

The major investors representing up to three quarters of the ownership are tipped to vote to redeem their capital, as happened with APPF Retail. These investors are different from those invested in the shopping centre fund but the liquidity window is this year.

This could mean the assets have to be sold and capital returned to investors unless the fund is able to raise fresh equity. The APPF independent board directors are under pressure to sell assets even ahead of that time to ensure the fund is well positioned.