Sydney office market surges as Blackstone eyes off $3bn in deals

Liberty Place in Sydney.
Liberty Place in Sydney.

The premium end of Sydney’s commercial property market is headed for greater heights, with US private equity group Blackstone looking to strike a series of deals involving about $3 billion worth of the city’s best office towers.

The group and Canada’s Ivanhoe Cambridge have just sold their one-quarter stake in the $1.6 billion-plus ANZ headquarters tower to industry superannuation fund-backed group ISPT.

ISPT chief executive Daryl Browning says the group likes the area and the latest purchase will complement its holdings in the city’s mid-town.

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“We know the building well, its been a good investment for us,” he says. “We think the precinct has been enhanced with the new metro station providing greater accessibility.”

The sale had pitted the tower’s co-owners, a GPT-run fund, which held a 50% interest, and ISPT, with 25%, against each other.

The deal showed a pricing reflecting a capitalisation rate of about 4.1% and was brokered by JLL’s Robert Sewell and Simon Storry and CBRE’s James Parry and Michael Andrews.

Liberty Place is a premium-grade office complex and comprises ANZ Tower, Legion House, 167 Castlereagh St, a retail plaza and a car park.

The 42-level bank tower offers harbour and city views and incorporates a dual-street frontage, connecting Castlereagh and Pitt streets.

Blackstone is now looking to sell one of the towers above Westfield Sydney for more than $600 million, after picking up the trio of towers for about $1.52bn in July.

Blackstone will sell off 100 Market Street in a play that could reap it more than $650 million, via JLL and Cushman & Wakefield. The A-grade complex fronts Castle­reagh St, Market St and Pitt St Mall.

It is positioned above Westfield shopping centre and adjacent to Myer shopping centre. It has large, 2800sq m floor plates and houses Scentre and the corporate regulator.

The move helps defray Blackstone’s purchase cost and could see it take a quick profit. The US group will retain 85 Castlereagh Street, which houses investment bank JPMorgan and lawyers Allen & Overy. It will also keep the smaller 77 Castlereagh St.

But its rapid move also shows just how much the market has jumped as cashed-up local and international players compete for assets. The strength of demand has allowed big buyers to pick up portfolios and then profitably carve them up.

Canada’s Oxford Property Group, via its Oxford Investa Property Partnership, has sold about $2.6 billion worth of assets since taking the Investa Office Fund private last year. It will notch up more than $3 billion of sales once more Sydney assets are sold.

The deal has put rising values on display. Blackstone and Ivanhoe Cambridge, the real estate arm of one of Canada’s largest pension funds, bought the tower stake when the building was worth about $1 billion in 2015.

There are some notes of caution. JPMorgan in a note on Friday says one surprise from the recent REIT reporting season was the softening outlook for office rent growth in Sydney and Melbourne, despite continued tight occupancy. “Demand has tapered especially when technology and flexible work space providers are excluded and sub lease space has increased in Sydney,” JPMorgan’s Richard Jones says.

He says if sub lease space continues to grow, this could lead to a correction in rents, yields and capital values. But this lies in the future, with any softening in capitalisation rates only likely over the medium term, with the impact likely in 2020 in Sydney and 2021 in Melbourne.

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