Brisbane property deal sparks investor rush back to equity
Boutique fund manager Quintessential has tapped a growing enthusiasm from investors for equity in commercial property – spurred by falling interest rates – to fund its acquisition of a $174.85 million Brisbane office block from super fund investor ISPT.
The transaction was exchanged and settled ahead of deadline after investors rushed a six-week $98 million equity raising, which closed oversubscribed last month after less than three weeks.
The acquisition of the 12-storey Green Square North Tower in Fortitude Valley will give its new owners a forecast annual income yield of as much as 6.5 per cent, along with an expected internal rate of return of 15 per cent to 19 per cent.
“Equity investing is coming back much stronger than probably what most people think,” Quintessential chief executive Justin Mills told The Australian Financial Review.
“Everyone’s talking credit, but there’s some good examples in more recent weeks and months of some really successful equity raises.”
The deal is also indicative of the changing tides of the commercial property market, where, after the pandemic, asset values came under intense pressure from rising interest rates and bond yields, which are typically used as the barometer for real estate pricing.
Office valuations were hit hardest, plunging by as much as 25 per cent in some cases. That has made the major institutions and listed players wary of buying back in until they can be confident that the downward spiral has finally levelled off.
In a period of uncertainty, it is the private platforms and syndicators that can make the early running, Mills said. In the retail sector, private syndicators such as Fawkner Property, Haben and Sentinel have been doing just that.
“During a time when the investors have been sitting more on the sidelines in some markets, there is good buying as long as you look at the risks. For us, it’s about taking the risk out first, preserving the capital,” Mills said.
On Quintessential’s estimate, the acquisition price for Green Square North reflects a 53 per cent discount to its replacement cost of $370 million. That’s significant amid a construction squeeze where developers are finding new builds costly to construct. At the same time, Brisbane’s office market is looking forward to a flow-on boost as activity steps up in preparation for the 2032 Olympics.
On St Paul’s Terrace, the building is fully occupied with 80 per cent of its space taken up by government tenants, a leasing profile that was reassuring to investors, according to Daniel Colman, Quintessential’s head of capital.
“We found that this deal was very well-supported for equity to come back into the office sector in a more risk-averse way,” he said.
One of the most evident risks in commercial property investment is leasing expiry: the Brisbane building had a relatively short average expiry of little more than two years. Quintessential turned that into an opportunity, signing on the biggest tenant for another seven years and bringing in a new tenant for six years, taking the building’s average leasing expiry past five years.
“We believe there was a 12 per cent to 20 per cent [potential] uplift in the rents and we’ve proved that to be true,” Mills said. “We think that bodes well for a revaluation at some point in time.”
Already such an uplift has been realised in another Brisbane office building that Quintessential acquired last year for $250 million. It’s been revalued recently at $281 million, based on its income growth.
More recently, Quintessential claimed a win for its investors who more than doubled their money in just six years after it sold a huge logistics facility at the Port of Adelaide for $216 million, in the state’s biggest ever industrial deal. It bought the Port of Adelaide Distribution Centre in 2019 for just $80 million from Stockland.
