Why this fundie thinks inner-city offices are a hot play
Boutique property fund manager Forza Capital is snapping up smaller office buildings, including this month in inner-city Sydney, in a counter-cyclical play it expects can deliver its investors a 6 per cent income return.
The purchase of the Darlinghurst property is the fund manager’s third such office building buy this year, a sign of its confidence that there are opportunities to be discovered in the battered sector.
Its acquisition is a heritage-listed, five-storey office at 223 Liverpool Street, a stone’s throw away from Hyde Park. Acquired from ST Real Estate for $64.5 million, the building is leased to co-working facility operator Hub Australia. The deal price represents a passing yield of 6.7 per cent and a fully leased yield of 8.2 per cent.
Forza director Adam Murchie is bullish on inner-city offices such as the one at Liverpool Street, arguing that they are an outlier to the broader office sector from being located “where the cool kids hang out”.
“The Surry Hills and Darlinghurst office market is an outlier. The convergence of technology, design and venture firms in the precinct creates its own flywheel of opportunity. These occupiers are not typically candidates for CBD office alternatives.” he said.
“Land holdings there are also small [and] heritage listed so it’s hard to create meaningful supply. That has meant there aren’t many new things going up there so when offices become available, they are highly coveted.”
Forza projects a 6 per cent distribution yield and an internal rate of return of between 14 per cent and 16 per cent net of fees for 233 Liverpool Street. Over the past seven years, ST Real Estate had earned about a 12 per cent annual return on cost of owning 223 Liverpool Street.
Underlying such returns is the demand created by the high concentration of young professionals living in inner-city suburbs and wanting to work locally, Mr Murchie said. The populations of Surry Hills and Darlinghurst comprise relatively higher proportions of 25 to 34-year-olds – 33 per cent and 31 per cent respectively – compared with 22 per cent for greater Sydney, according to latest census data.
Sydney’s inner-city offices also have a vacancy rate of just 3.4 per cent, significantly lower than the 11.6 per cent vacancy rate of the Sydney CBD. At the same time, Darlinghurst offices have posted 8 per cent annual rent growth for the past 7 years.
The Darlinghurst deal is the latest example of Forza Capital investing into its counter-cyclical strategy for the office sector. It follows the purchase of 117 Clarence Street in the Sydney CBD for $130 million in January and of 3-8 Hamilton Street in Victoria’s Mont Albert for $15.5 million in July. The Mont Albert deal price represented a 45 per cent discount to the $28.3 million the vendor had paid for the property in 2021.
For the Darlinghurst opportunity, Mr Murchie said Forza Capital raised $43 million in less than 30 days from its wealthy client base despite the negativity around offices. The strength of that demand showed property investors were also confident that some inner-city office opportunities could outperform the headwinds challenging the broader sector, he said.
The Darlinghurst property was brokered by Knight Frank’s Jonathan Vaughan.
