Sydney CBD comes alive with $6b of office towers in the market
Sydney’s CBD office transactions market could experience a dramatic rebound by Christmas with more than $6 billion of office towers being offered for sale, following an almost-lifeless first half when vendors sat on the sidelines waiting to see the effect of COVID-19 on the economy.
The sudden influx of large office assets that could potentially be traded is now equal to the number that transacted last year. However, the economic landscape is very different with pricing expected to come under pressure for certain assets.
Australia is officially in recession for the first time in 29 years after posting a 7 per cent fall in June quarter GDP – the biggest since records started in 1959.
Nevertheless Knight Frank chief economist Ben Burston expects pricing for the “best in class” prime assets to hold firm – as opposed to selling 10 or 15 per cent above book value as they were last year – but for yields to soften across secondary assets exposed to greater leasing risk.
“In contrast to the experience during the GFC when interest rates were much higher and the market was exposed to over-leverage, few vendors are under pressure to sell,” Mr Burston said.
“While the latest GDP result confirmed a deep recession in the first half of 2020, the Australian economy still looks more resilient than other major global real estate markets and is viewed as having more long-term growth potential, hence cross-border investors will continue to favour core Australian office assets.”
But, he warned, leasing conditions were challenging, placing a premium on income security and travel restrictions could also reduce the number of buyers competing for large assets in the market.
Knight Frank research shows only $992 million worth of CBD assets have so far sold this year, with just one deal over $500 million. That compares to seven $500 million-plus deals in 2019, with $9.2 billion of CBD properties sold in total.
But there are now seven assets worth more than $500 million in the CBD that could be sold by the end of the year.
Fund manager Charter Hall is the latest group testing the market, offering its landmark tower at 9 Castlereagh Street for sale for about $400 million, through Cushman & Wakefield’s Josh Cullen.
Charter Hall bought the Harry Seidler-designed building through its Core Plus Office Fund in 2013 from Stockland for $172 million.
Chief executive David Harrison is confident now is a good time to test the market, arguing there is very little quality stock available. The property powerhouse already had a large exposure to the CBD precinct, with recent acquisitions including a half stake in Sydney’s landmark Chifley Tower, which it bought for around $900 million last year.
The country’s largest office landlord Dexus, following a competitive shortlisting process, has also increased its offering to the market of a stake in the $2 billion-plus Grosvenor Place from 25 per cent to 50 per cent, with one of the building’s co-owners, Chinese Investment Corporation, leading the charge for the asset.
Paul Roberts, Knight Frank’s national head of capital markets, said the high volume of CBD stock available pointed to strong sales activity for the second half of the year.
“In a low interest rate environment, there will be sustained appetite for core assets offering long income streams that allows investors to look through the current period of uncertainty,” he said. “But not all assets will meet the narrow criteria required by some investors.”
