Big Sydney office tower deal could be tonic for deal-starved market

So far, analysts of the listed property stocks and fund managers are not too worried, citing significantly different finance arrangements in the Australian market. In the US, commercial property loans are typically non-recourse, so landlords can simply hand the keys back to the lender when it gets too tough.

As well, Australia’s major real estate investment trusts (REITs) usually borrow at the corporate level rather than against individual assets as is common in the US, Jefferies analyst Sholto Maconochie said. Higher levels of gearing are also used in the US.

“It’s very a different market. I don’t think it has any contagion [implication] for here,” he said.

Office tower valuations – challenged by the sharp rise in interest rates and weaker demand for space as workers stay home – are expected to fall further. But much of that weakness has already been priced into their stocks, which are trading below the value of their portfolios. In effect, the market expects office values to fall – in fact, it may have overshot – the only question is how long it will take.

Market reassured

JPMorgan expects values to trough by the middle of the year, marking a 10 per cent peak-to-trough decline over the past two years. Colliers valuations head Dwight Hillier is tipping a larger total fall of about 25 per cent, with another 10 or 15 per cent to go this year.

But that’s why, perversely, the prospect of a major deal in Sydney – the mooted sale by ASX-listed Mirvac of a half stake in 255 George Street to Singapore’s Keppel REIT – will reassure the market, even though it’s being struck at discount.

If the deal – brokered by JLL and Cushman & Wakefield – goes ahead as hoped, it will value the entire building at about $730 million, roughly a 10 per cent discount on its book value and on an investment yield of about 6 per cent.

Those metrics will provide critical benchmarks for would-be buyers and sellers of office towers and could help kick-start a transactions market stranded in a stalemate over appropriate pricing.

Grant Berry, portfolio manager at SG Hiscock, said the office market was facing some of the toughest conditions since the recession of the early 1990s – although not nearly as bad – but said there was little risk for the major landlords whose balance sheets were conservatively geared.