This article is from the Australian Property Journal archive
THE commercial real estate market’s phase of price discovery has become more and more challenging for both buyers and sellers, but the near-$300 million sale of a Sydney office tower could shine a spotlight on where values are currently sitting.
Quintessential Equity is reportedly in the box seat to buy 1 Margaret Street from Dexus, telling prospective backers it will acquire the 18-level prime-grade tower for $296 million – at a sizable 21% discount to the 30th June book value.
That is expected to reflect a high 6.7% initial yield, or 7.2% on a fully leased basis. Major tenants BDO and Cuscal’s leases expire in mid-2025, giving the tower a 2.1-year weighted average lease expiry (WALE)
There have been very few major office transactions of late, and the March quarter saw commercial property transaction volumes fall to $5.3 billion – the lowest level since early 2012 – according to MSCI Real Assets, with higher debt costs and pricing uncertainty putting off both buyers and sellers.
“While its common to see transaction volumes drop during periods of rising interest rates, the slow activity introduces other uncertainties. With fewer deals the process of price discovery becomes challenging for both buyers and sellers, which can cause more restraint in markets,” said MSCI head of Pacific real assets research, Benjamin Martin-Henry, who was presenting at the Property Funds Association of Australia’s 2023 Conference in Canberra this week.
Industrial, retail and office sectors all showed declining sales activity in the quarter.
“Current challenges facing the market are common, in contrast with what we saw in the early days of the pandemic. Markets take time to adjust to rising rates, and may be looking for a clear direction,” Martin-Henry said.
“The unknowns around credit markets and economic fundamentals may be causing investors to become more subdued. But there has also been a recent context of roller coaster fluctuations since COVID, which we have seen with record highs last year and a slowdown this year.”
Australian asset owners have looked on as values overseas have come off heavily in the COVID fallout of higher vacancies, lower occupancy, and higher incentives. The trend is expected to land down under.
Listed office asset values have held up so far in Australia, but are likely to fall in the coming 12 months because of weaker market fundamentals and the increasing cost of debt, Moody’s Investors Service has said.
Barrenjoey analysts have warned office tower prices could come off by 15% to 20%. Colliers is expecting capital values to drop by an average of 10% from peak-to-trough, before the market recovers in 2024, a much less turbulent trajectory than the GFC which saw some assets suffer 25% in devaluations.
Dexus, which is also shopping round 44 Market Street, has said transaction markets are “likely to remain soft” over the next six months.
Occupants in the 26-level 44 Market Street include the Australian Bureau of Statistics. The tower is 85.4% full and the WALE is also low, at 2.7 years, while it returns net passing income of $24.3 million.
The market is also eagerly awaiting the result of Blackstone’s offering of the JPMorgan tower at 85 Castlereagh Street, which had a June book value of $835 million, and Mirvac’s prospective sale of 60 Margaret Street.
