Office assets still in high demand as yields tighten on quality stockInternational investor interest is strong in Sydney’s Darling Quarter office complex.

Office assets still in high demand as yields tighten on quality stock

Quality Sydney offices with long leases to blue-chip tenants are in hot demand despite the ravages of COVID-19 and the looming threat of the omicron variant as strong bidding forces investment yields down to historically low levels.

It is understood that bidders for a stake in Darling Quarter have taken the initial yield under 4 per cent, while market sources say Abacus is in due diligence on Blackstone’s office building at 77 Castlereagh Street on a yield of around 5 per cent.

The rush of investment into prize office towers comes as a vote of confidence in CBD workplaces, and is being driven by international investors hunting for income-producing real estate assets occupied by tenants with the financial capacity to weather disruption.

Abacus is said to have agreed to pay more than $250 million for 77 Castlereagh Street, which Blackstone bought from Scentre Group for $1.52 billion as part of a three-asset deal in mid-2019 that also included 100 Market Street and 85 Castlereagh Street.

Due diligence is well advanced on the asset, which is 97 per cent leased to quality long-term tenants and has a weighted average lease expiry of more than four years.

Blackstone sold 100 Market Street to Link REIT for $683 million just a few months after buying it and still holds the tower at 85 Castlereagh Street, anchored by investment bank JP Morgan.

A much bigger deal is brewing at Darling Harbour, where bullish bidding on the Darling Quarter office building – underpinned by a 14-year lease on favourable terms to the Commonwealth Bank – has attracted intense interest, mostly from overseas capital.

Allianz is believed to be the front-runner for the 50 per cent stake held by the Abu Dhabi Investment Authority (ADIA), while strong offers have also been received from Singaporean investors GIC and Mapletree, and Australian super fund Cbus Property.

Originally, 100 per cent of the asset was on the market. However, Lendlease -which owns the other half through its wholesale Australian Prime Property Fund Commercial – decided not to proceed.

Based on a yield of just under 4 per cent, the final purchase price is expected to be more than $600 million, putting it among the biggest office deals of 2021 should it close.

As co-owner, Lendlease will still have an opportunity to trump the top bid and take control.

In other significant Sydney office deals this year, Mirvac partnered with M&G Real Estate to buy the 50 per cent of 200 George Street it didn’t already own for $575 million on a yield of 4.1 per cent, and the Woolworth headquarters at Bella Vista was bought by AIMS APAC REIT for $463 million on a yield just above 5 per cent.

But not everything is selling. Aware Super has decided to withdraw the twin towers at 207 Pacific Highway, St Leonards, known as Space 207, from sale even though it is believed to have received offers close to the initial price guide of $280 million.

Aware Super has changed tack and is now looking at Space 207 as a long-term hold with development potential.

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