Buyers circle $300m landmark
An expressions-of-interest campaign, run by Colliers International, has closed and a number of buyers, both overseas and domestic, are said to have shown interest. Given the lack of supply in the Sydney market for fully-leased, high green star-rated sites, prospective buyers range from overseas funds to cashed-up Australian real estate investment trusts.
Likely contenders include domestic REITS such as Abacus and Cromwell as well as the super funds, and Chinese investors including Bright Ruby.
Buyers are also said to be getting closer to a decision on GE Capital's long-running asset sale and taking a serious look at the $300 million NSW government office portfolio.
However, as yet no sales have been completed.
Agents attribute the slow market to a combination of new buyers taking their time with due diligence and vendors holding out for higher values.
According to Deutsche Bank analysts, given the strong performance of the AREITs, there remains plenty of interest in the sector. However, as the trusts surpass their net tangible asset level, it is getting tougher to find value - particularly from the AREITS.
"While the AREITs are no longer as cheap as they were, US investors are likely ongoing buyers as they believe they don't look too expensive," the Deutsche analysts said.
"The US clients see the AREITs as providing good yield in a reasonable economy and stable financial system, and from a fundamental standpoint the real estate spread remains especially wide, with the expectation that capitalisation rate compression is still to come." There is also supportive analysis showing Australian domestic fund managers remain significantly underweight in AREITs, with the possibility of further capital inflow into the sector.
At present, the allocation to AREITS is about 8 per cent but is forecast to rise to more than 10 per cent as managers look for higher-yielding sectors at a time when cash rates are low.
However, Deutsche Bank issued a cautionary note, saying that although strong demand for office assets and the likely resultant capitalisation rate compression provides a positive backdrop for the office stocks, this needs to be weighed against weak underlying occupier market conditions.
"Post-recent price moves, office-focused REITS appear stretched, given a weak outlook for rental growth. Our revised forecasts show average 2012-16 net effective rent growth of negative 1.9 per cent per annum for Sydney and a negative 2.5 per cent per annum for Melbourne," the analysts said.
"Office AREIT relative performance has in the past tracked net effective rent growth, suggesting underperformance from here."
Frequently Asked Questions about this Article…
Centennial Plaza at 260 Elizabeth Street is a Sydney office tower being sold by Investa Property Group. The building is being marketed with a price expectation of about $300 million (reported as $300 million-plus) as part of an expressions-of-interest campaign.
Colliers International ran the expressions-of-interest campaign for the sale. Several buyers — both overseas and domestic — have shown interest, though no sale has been completed yet.
Potential buyers range from overseas funds and Chinese investors (including names like Bright Ruby) to cashed-up Australian real estate investment trusts (AREITs) such as Abacus and Cromwell, as well as superannuation funds.
Agents say there is a lack of supply in the Sydney market for fully‑leased, high green star‑rated sites, which has increased interest from buyers seeking such assets. That scarcity makes these properties attractive to both domestic REITs and foreign funds.
Deutsche Bank analysts note strong performance in AREITs and continued interest, particularly from US investors who view AREITs as providing good yield. They also point out domestic fund managers are significantly underweight AREITs — current allocation about 8% — and forecast it could rise to more than 10% as managers hunt higher‑yielding sectors while cash rates remain low.
Deutsche Bank suggests that strong demand for office assets could lead to capitalisation rate compression, which is positive for office stock valuations. However, this potential benefit needs to be weighed against weak occupier market conditions and rental outlook, so investors should be aware of both forces.
Yes. Deutsche Bank issued a caution that office‑focused REITs now look stretched after recent price moves given a weak outlook for rental growth. Their revised forecasts show average 2012–16 net effective rent growth of negative 1.9% per annum for Sydney and negative 2.5% per annum for Melbourne, which could signal underperformance for office AREITs.
Agents attribute the slow market to new buyers taking extra time for due diligence and vendors holding out for higher values. While interest exists — including in other assets like GE Capital's portfolio and a $300 million NSW government office portfolio — transactions had not been completed at the time of reporting.
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