Sydney’s tallest tower to test battered office market
Japanese investment giant Mitsubishi Estate Asia has put its 30 per cent stake in Sydney’s Salesforce Tower up for grabs, in a high-profile, $600 million test for the nation’s battered office market.
A sale at that price would value Sydney’s tallest tower at $2 billion, roughly a 10 per cent discount to what it was worth two years ago. The Japanese fund may even be willing to trade out on offers below that pricing, according to market sources.
The offering will be closely watched by major domestic and foreign investors and fund managers. A successful sale will help set a clear benchmark in an office market where values have fallen substantially over the past two years in response to high interest rates, weaker demand for space and the rise of remote work.
Mitsubishi Estate’s bid to sell its interest in Salesforce Tower comes after Chinese insurer Ping An – which holds a half stake in the asset – failed to find a willing buyer last year.
Ping An had put its half stake up for sale in February last year but took it off the market four months later after only receiving bids about 10 per cent lower than it hoped.
By comparison, Lendlease, which developed and manages the 55-storey building at 180 George Street as a fund manager, brought its investment arm in for a 20 per cent stake two years ago in a deal that valued the tower at around $2.2 billion.
Mitsubishi’s investment arm, which last week made its first investment into Australia’s industrial sector by partnering with global platform ESR on a $175 million estate in south-east Melbourne, said it wanted to sell down the Salesforce stake to recycle capital into upcoming local residential and industrial projects.
Other projects in Mitsubishi’s portfolio includes investments in luxury apartments with Lendlease at One Circular Quay in Sydney, in land lease housing communities with Stockland and in Mirvac’s growing build-to-rent portfolio.
“This divestment bolsters MEA’s strategic expansion in Australia, where we continue to participate in more development projects across our real estate sectors of focus, including living, office and industrial,” Mitsubishi Estate’s Australia head Yuzo Nishiyama said.
CBRE’s Flint Davidson and Stuart McCann have been appointed to manage the sale campaign of Mitsubishi’s stake of Salesforce Tower.
Mr McCann said the Salesforce offering came as foreign capital sentiment had improved in the past quarter, with the gap between seller and buyer expectations narrowing.
“International interest in the Australian office market, particularly the Sydney CBD, has noticeably improved in the last quarter. This is being driven by a combination of genuine value emerging, with pricing reverting 20 per cent to 30 per cent from the peak, together with continued strong leasing performance. Australia’s office sector now looks to represent the best value in the Asia Pacific region,” he said.
In June, ASX-listed Mirvac sold a two-thirds stake in a planned $2 billion Sydney office tower to Mitsui Fudosan while earlier this year Mirvac sold a $364 million half-stake in a George Street tower to Singapore’s Keppel REIT at a 17 per cent discount to it peak book value.
More tests are on the way for a market that may finally be nearing the bottom of the devaluation cycle, according to analysts.
20 Bridge Street in central Sydney hit the market this week. The tower, known as ASX House, was put up for sale after ASX committed to trading up to the upcoming 39 Martin Place, which is set to be completed later this year. Knight Frank’s Paul Roberts has been appointed to sell the tower.
Other notable Sydney towers that remain on offer are Charter Hall’s 333 George Street and Brookfield’s stake in 388 George Street.
The flow of opportunities in the office market come as the broader commercial property market shows signs of resurgence after two lacklustre years, according to MSCI’s regional research chief Benjamin Martin-Henry.
Office deal sizes are getting bigger, and growth in investment yields – which typically moves in the opposite direction to values – is slowing, while the volume of deals is rising, according to the MSCI data.
Transaction volumes for all commercial property over Q2 2024 were $11.8 billion, just 5 per cent below the comparable quarter a year ago. That represents a significant improvement compared to the sharp double-digit decline only one quarter ago.
Nevertheless, volumes for the second quarter are still 27 per cent below the five-year average, indicating the market is still off its usual pace.
“However, this recovery was not expected to be V-shaped like the post-COVID resurgence,” Mr Martin-Henry said.
“A key driver of the uptick in transaction levels is the convergence of pricing expectations, thanks to significant write-downs in valuations, particularly for offices.”
Deals in office buildings hit $3.6 billion in the second quarter, up81 per cent year-on-year, indicating that buyer and seller expectations may have realigned after significant write-downs in the sector, according to Mr Martin-Henry.
“Investors acquiring office properties evidently believe in the sector’s long-term viability and are happy to take advantage of the discounts currently on offer,” he said.
