City investors reach for sky with deals worth $650m

MORE than $650 million of prime Sydney office skyscrapers have changed hands in the past two weeks as investors look to get a foothold in the market amid forecasts of strong rent rises.

By InvestSMART · 29 Jul 2011

By InvestSMART ·
29 Jul 2011

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MORE than $650 million of prime Sydney office skyscrapers have changed hands in the past two weeks as investors look to get a foothold in the market amid forecasts of strong rent rises.

Yesterday, the private investment group Memocorp added to its portfolio with the $395 million purchase of 259 George Street, anchored by the bank and insurance group Suncorp Metway, from the Commonwealth Property Office Fund (CPA).

Memocorp, backed by the Singapore magnate Mr Tay Tee Peng, already owns the Wynyard Green tower at 11 York Street and the office block at 1 Oxford Street.

The sale adds to the acquisition two weeks ago of a half share in Mirvac's Goodsell site at 8 Chifley Square by the Singapore-based K-REIT. NCR House in North Sydney was recently bought by the Australian Catholic University, and Abacus Property Group snapped up 309 George Street.

In the first half of this year the sale tally was $200 million, indicating that, despite the spectre of higher interest rates and a slowing economy, office towers are now being keenly sought.

The impetus for the rush of deals has been the forecast reduction in office vacancies across Sydney's central business district. All agents have indicated that, owing to the lack of new buildings and a rise in employment, vacancy rates could be as low as 6per cent [from the present 7.8per cent] by the end of this year.

CBRE's executive director of global research and consulting, Kevin Stanley, said that, while there was some scope for a slight compression in investment yields, income growth would be the key value driver in the recovery.

"It has taken longer than we may have initially expected but prime rents are increasing and incentives are starting to move down and, combined, [these] will provide a super boost to returns over the next 12 to 18 months," he said.

Under the terms of the 259 George Street sale, Memocorp paid a 15.3per cent premium on the latest independent valuation of the property, made on June 30.

Charles Moore, the fund manager of CPA, said the proceeds would be used to retire debt. He said the fund was also looking at options to boost earnings, such as reinvesting some of the cash in developments or potential acquisitions. CBRE's senior director of institutional investment properties, Josh Cullen, who, with Rob Sewell, advised on the sale, said the transaction was a strong result and achieved the goals of both parties.

"Colonial achieved a strong result relative to the building's current book value, while the purchaser has been able to secure a 100per cent freehold property in the tightly held Sydney commercial market," Mr Cullen said.

"The strength of the offer reflects the buyer's confidence in the tightening market fundamentals as the Sydney leasing market continues to strengthen."

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Frequently Asked Questions about this Article…

What big office property deals recently happened in Sydney's CBD?

More than $650 million of prime Sydney office skyscrapers changed hands in the past two weeks. Notable transactions include Memocorp’s $395 million purchase of 259 George Street (anchored by Suncorp Metway) from the Commonwealth Property Office Fund (CPA), a half-share acquisition in Mirvac’s Goodsell site at 8 Chifley Square by Singapore-based K-REIT, NCR House being bought by the Australian Catholic University, and Abacus Property Group acquiring 309 George Street.

Who is Memocorp and what did it pay for 259 George Street?

Memocorp, a private investment group backed by Singapore magnate Mr Tay Tee Peng, bought 259 George Street for $395 million. Under the deal Memocorp paid a 15.3% premium to the property’s latest independent valuation (as at June 30) and already owns the Wynyard Green tower at 11 York Street and the office block at 1 Oxford Street.

Why are investors still buying Sydney office towers despite higher interest rates?

Agents and market commentators say investors are chasing Sydney office towers because vacancy rates are forecast to fall, there’s little new supply, and employment is rising. These fundamentals are supporting expectations of stronger rents and lower incentives, which is encouraging buyers even in a higher-rate environment.

How are vacancy rates and rents expected to move in the Sydney office market?

The article reports that vacancy in Sydney’s CBD could fall to around 6% from the current 7.8% by year end. CBRE’s research suggests prime rents are increasing and tenant incentives are starting to come down — trends that should support income growth for office investors.

What did CBRE say about yields and income growth for office investments?

CBRE’s Kevin Stanley said there may be limited scope for a slight compression in investment yields, but that income growth — driven by rising prime rents and falling incentives — will be the key value driver in the recovery. He expects these factors to provide a notable boost to returns over the next 12 to 18 months.

How did the seller (CPA) plan to use proceeds from the 259 George Street sale?

Charles Moore, fund manager of the Commonwealth Property Office Fund (CPA), said the proceeds would be used to retire debt. He also indicated the fund was considering options to boost earnings, such as reinvesting some cash into developments or potential acquisitions.

Did buyers pay a premium for prime Sydney office assets and what does that indicate?

Yes — Memocorp paid a 15.3% premium on the latest independent valuation for 259 George Street. CBRE’s advisers (Josh Cullen and Rob Sewell) described the transaction as a strong result that met both parties’ goals, noting the offer strength reflects buyer confidence in tightening market fundamentals.

What are the key takeaways for everyday investors from these Sydney office market deals?

The recent activity shows institutional and private investors are targeting prime Sydney office assets because of tightening fundamentals: falling vacancy, limited new supply, rising employment and upward pressure on prime rents. According to market experts quoted in the article, income growth — rather than yield compression — looks set to drive returns in the near term. These are trends to watch when evaluating exposure to commercial property.