This article is from the Australian Property Journal archive
EXCLUSIVE: DEXUS is looking to further reduce its exposure in the underperforming office sector, putting $100 million of Melbourne offices on the market, which at the peak was valued at over $160 million.
The Dexus Wholesale Australian Property Fund is divesting 425 Collins Street in the CBD and 636 St Kilda Road.
The fund believes the time is right to make the call after its latest property revaluations in the Q2 resulted in a 0.7% increase. Although the average cap rate across the portfolio has risen significantly to 6.47% from 5.18% in June 2022.
Except for 636 St Kilda Road, all properties were either flat or rose in value during the quarter.
636 St Kilda Road is larger asset (by value) of the two assets being sold by Dexus. It was valued at $59 million as at June 30 2024, on a cap rate of 8%. But the latest valuation is significantly below the peak book value of $121.8 million as at December 31 2019.
The 18-level A-grade building comprises 17,049 sqm of office space and occupies a high profile 4,533 sqm corner site. It was formerly the headquarters of Cadbury Schweppes company, which occupied around 7,000 or 40% of the space within the building.
The building has a low occupancy rate of just 39.9%, furthermore the weighted average lease expiry is only one year, after Cadbury decided not to renew its lease in 2021 and the building has struggled to find a replacement.
That difficult task has been exacerbated by Melbourne’s high office vacancy rates, which continues to rise.
The Property Council’s latest Office Market Report found almost 1 million sqm of office space is available – equivalent to almost 10 Rialto towers. The amount of available space is expected to continue to increase as another 250,000 sqm is forecast to come online by 2026, of which only 20% is space pre-committed.
The St Kilda Road high profile property was acquired by the AMP Capital Wholesale Property Fund in 2015 for $90 million on a yield of 7%, as part of a $300 million portfolio acquisition sold by Blackstone, which bought the property in 2013 from GE Capital.
Dexus assumed control of the fund following its acquisition of the AMP platform.
Dexus is also marketing 425 Collins Street in the CBD, a building AMP bought back in 2015 for sentimental reasons because AMP had developed the building in 1931 as its headquarters.
AMP bought the asset from the Indonesian-based Halim family for $39 million.
The Collins Street building was recently valued at $40 million as at June 30 2024 with a cap rate of 5.75%. The value is marginally below the peak of $42.5 million as at March 31 2020.
Designed by Bates, Smart and McCutcheon, the heritage-listed 425 Collins St comprises a 10-level office and retail building with a lettable area of 5,350 sqm. The property includes 45 car parking spaces and sits on a 1,168 sqm site. It is currently 78.2% occupied with a WALE of 2.9 years.
Fund manager Christopher Davitt told investors that the sales will allow the fund to maintain low gearing levels, which is currently 27.3% of gross assets. The total size of the banking facility is $800 million, which equates to 42.4% of gross assets as of 30 June 2024.
“The fund’s long-standing strategy is to maintain a buffer of undrawn debt which is available as a contingency. To this end, the maximum amount the fund may borrow has been temporarily increased to 45% of the gross assets at the time the debt is drawn. The long-term target of holding debt in the order of 0-15% of gross assets has been maintained and the maximum allowable debt is intended to revert to 35% of gross assets from 1 July 2027.” Davitt said.
These two listings come as office transactions are forecast to fall to their lowest level in two decades. Investment activity tallied a low $600 million in the first half of the 2024, according to Urban Property Australia’s latest Victorian Property & Economic Outlook.
It has been a quiet period with only a few notable transactions and they’ve all transacted in the past month, including Charter Hall selling 200 Queens Street to the Barristers’ Chambers for $190 million and Mirvac’s sale of 367 Collins Street for $345 million – 20% below peak values.
Prior to that Swiss fund AFIAA sold 628 Bourke Street for $115.8 million to Bayley Stuart. The sale result will be disappointing for the Swiss fund as the sale price is below the $185 million it paid M&G Real Estate seven years ago and AFIAA spent a further $35 million refurbishing the building.
At the same time, landlords continue the difficult job of finding tenants in a market where vacancy rates have risen to 18% from 16% in the first half year. Although enquiry levels improved, at 628,500sqm, or the second highest enquiry by area over the decade but down 8% from the FY23 peak.
Meanwhile the fund confirmed it has reached terms to sell 121 Evans Road Salisbury in Brisbane’s south in an off-market deal.
The sale was previously reported by Australian Property Journal at a small premium to the book value of $52.7 million as at June 2024.
In the Q1 of this year the fund sold two industrial facilities for over $140 million. The fund divested the 13-19 William Angliss Drive, Laverton North property in Melbourne’s west, leased to recycling company Visy for $92 million, a premium to the valuation of $57.5 million, as well as a distribution facility at 704-744 Lorimer Street Port Melbourne for $61 million – an 11% premium to the 31 December 2023 valuation.
