Hectic time for REITs

According to a number of agents, there has been close to $4.5 billion of office sales in the Sydney market in three months.

The real estate investment trust sector is bracing for a busy few months in terms of sales and new leasing deals in the lead-up to the annual reporting season and through to the end of the calendar year.

The REITs have seen a busy few months post the June 30 balance date, with some leasing deals being executed and others in the pipeline.

One of the biggest discussions is the possibility of the third commercial tower at Barangaroo South being constructed. According to the co-owner and developer of the project, Lend Lease, it remains on track and discussions are under way with a range of tenants.

One possible name, although unlikely to be an anchor tenant, is the Australian Securities Exchange (ASX), which has a requirement for about 11,700 square metres.

It leases space at 20 Bridge Street but is said to be looking at its contract and considers Barangaroo South as an attractive place to work.

According to JP Morgan's analysts, office-leasing conditions remain extremely tough across the major central business districts, but this doesn't hit every landlord equally.

"The regular cycle of tenant churn provides ample opportunities for REITs with the highest-quality portfolios and most capable leasing teams to outperform," the analysts said.

"Further, supply pipelines are responding to weak demand with few major commencements over the past six months, and we expect improving residential markets to drive a wave of residential conversions, particularly in Sydney."

The analysts said that combined with improving business confidence, this suggests a scenario where conditions could moderate earlier than expected.

"Our preferred office exposures are DEXUS Property Group and Mirvac due to overweight Sydney positions, and high-quality, well-leased portfolios that are best placed to secure tenants and benefit from cap rate compression," the analysts said.

According to a number of agents, there has been close to $4.5 billion of office sales in the Sydney market in three months and the most active players include the REIT sector.

There remains a number of key assets on the market, including the remaining tranche of NSW government assets.

The assets owned by the Commonwealth Property Office Fund (CPA) could also change hands, if Dexus exercises its option and makes an offer. That would likely see some rationalisation of the CPA portfolio, which would be attractive to office REITs.

Analysts said the office tower owned by Westfield at 85 Castlereagh Street, was also on many REIT managers' radars, if Westfield ever decided to sell.

The residential market will be another area of focus for the REITs.

Scott Molloy, an analyst at JP Morgan, said he expected the recovery in residential demand to tip the balance for the best and highest use for some secondary office space in favour of a residential conversion, or for future office developments towards residential developments.

"This is particularly likely where the location is suited to residential, such as around Hyde Park and Circular Quay in Sydney," he said.

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