Offshore investors target Aussie office bargains

222 Exhibition Street in Melbourne
222 Exhibition Street in Melbourne

Singaporean sovereign wealth fund Government Investment Corporation has kept up its property buying spree during the coronavirus pandemic, picking up a half stake in a Melbourne office tower in a deal valuing the building at about $410 million.

Offshore investors are still buying in Melbourne with the bargain-hunting getting under way as they look to capitalise on buildings that are being offered as the heat comes out of the market, although deep price cuts are yet to occur.

In an under-the-radar deal, GIC picked up a half interest in 222 Exhibition Street for $205.675 million, after it made an “off-market” approach. The interest was acquired from US investment house LaSalle Investment Management acting on behalf of pension group CalSTRS.

LaSalle had paid an AMP Capital-run fund $231m for the 30-level office building in 2015, so it made a profitable selldown of the half stake. The buy showed only a slight value slip since the coronavirus crisis hit the office market.

The A-Grade tower sits in Melbourne’s northeastern precinct and the building’s major tenants include the Victorian government, with 59% of the space, and co-working company WeWork, that has about 17% of the space.

About 11% of the income is derived from a lease to Secure Parking, which operates 478 bays, and both this element and the co-working group are under pressure, with WeWork saying it was seeking relief from landlords.

The building had a weighted average lease expiry of about 5½ years, which would see it past the worst of the pandemic, and it traded at an initial passing yield of 5.1 per cent.

A series of office buildings were taken off the market during Melbourne’s first lockdown but there was a window before the renewed lockdown that saw some activity.

In April, the listed Dexus and GIC, teamed up to buy a half stake in Melbourne’s Rialto complex in a deal that valued the twin tower skyscraper at about $1.3 billion. The $644 million acquisition means they now own the building alongside the Grollo Group controlled by Rino Grollo, of the construction family who built the tower with the backing of Kuwaiti-backed St Martins Properties.

The purchase from the Middle Eastern group was a boost for offices, indicating that values at the very top end are likely to hold despite the coronavirus crisis.

Other buildings are also selling. Singapore-listed property developer Roxy-Pacific Holdings and TE Capital Partners, run by third-generation family members of Singapore’s Tong Eng Group, teamed up to buy a 21-storey building at 350 Queen Street for $145 million. The deal was agreed in January and settled this month.

The latest GIC purchase was brokered during the crisis and observers said a slight price reduction had been seen — with the building winning interest at about $420m before the pandemic struck — but it will likely give valuers confidence about office buildings.

Listed companies Dexus and Charter Hall have trimmed the value of their offices but most of the pain has been in shopping centres, where values have fallen heavily as large chains withhold rent and many smaller tenants would be on the brink of collapse without government stimulus.

The deal shows high-quality office buildings remain in demand, even as staff are ordered to stay home while the restrictions in Melbourne are in place and the market faces forecasts of higher vacancies and rising sublease space, which will weigh on rents in coming years.

The next test will come as RMIT University looks to sell and lease back its prominent Bourke Street tower in the Melbourne CBD for more than $120 million.

The tower is a mix of office and teaching space and has been refurbished. CBRE’s Kiran Pillai, Mark Coster, Scott McGlone and Stuart McCann and Gross Waddell’s Andrew Waddell, Raoul Salter, Michael Gross and Danny Clark are managing the sale of the building at 235 Bourke Street. Mr Pillai said the building was surrounded by pre-eminent office towers and was set to further benefit from the new Town Hall train station.

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