Rate rises take 14pc bite out of East Melbourne office sale
A succession of interest rate rises has slashed the valuation of an East Melbourne office building, after it changed hands for 14 per cent below its initial asking price.
The five-level office building at 289 Wellington Parade South was put on the market in May by Adelaide-based syndicator Harmony Property Investments with price expectations above $60 million.
On a prime site opposite Treasury Gardens and overlooking the Treasury Square development site, it sold this week to Melbourne investment firm Bayley Stuart for $51.785 million.
At the time of its listing, its sale was seen as a barometer of office values, as it coincided with the start of a cycle of rising debt costs as the Reserve Bank rapidly increased the cash rate.
During the sales campaign for 289 Wellington Parade South, the RBA increased the benchmark borrowing rate by 250 basis points from 0.35 per cent to 2.85 per cent.
Despite the cut in valuation, the 5526 square metre office tower sold on a relatively tight 4.5 per cent passing yield, though this is expected to increase to 6 per cent once the building is fully leased.
It also generated a strong capital gain for Harmony, which acquired the office building from developer Becton for $27 million in 2010.
For Bayley Stuart – headed by Andrew MacGillivray – the East Melbourne building adds another asset to a commercial portfolio that includes two towers on St Kilda Road and an eight-level office building in Cremorne acquired off the plan for $50 million in 2018.
Mr MacGillivray said acquisition was part of the firm’s focus on “flight-to-quality modern office assets in attractive CBD fringe locations”.
“289 Wellington Parade South is a high quality modern asset that was ahead of its time with environmentally sustainable design features, exclusive terraces and a rooftop space with outstanding views,” he said.
“It’s [also in an] extremely attractive East Melbourne location, just moments from the CBD while in tranquil leafy surrounds.”
The low-rise office building and a 19-level apartment building alongside it were completed by Becton in 2009.
It sold bringing in $2.36 million in rental income on a weighed average lease expiry (WALE) of 3.5 years. Just under a fifth of the building was vacant when it hit the market. Its major tenant is insurance broker Arthur J Gallagher & Co.
Daniel Wolman, Matt Stagg, Oliver Hay and Leon Ma brokered the sale on behalf of Harmony Property Investments.
“The transaction demonstrates long-term investor confidence in high quality and well located Melbourne CBD and city fringe office assets despite the current rising interest rate environment,” Mr Wolman said.
“289 Wellington Parade South received strong domestic and international buyer interest because the precinct is underpinned by state government Victoria which has attracted major investment and development including 32 Flinders Street, Melbourne (GPT Funds Management), 30 Flinders Street (Time & Place), 21 Spring Street (Cbus Property) and 85 Spring Street (Pelligra Group).”
In July, a company associated with the family of Malaysian timber tycoon Admond Looh paid $23 million for Marlion House – a converted warehouse originally built for tea merchants Griffith Brothers – at 33-41 Agnes Street in East Melbourne on a yield of 4.6 per cent.
Also in East Melbourne, developer Luxcon is building luxury apartments at 380 Albert Street.
