The $1.4b office tower deal Sydney is waiting for

Those high rates coupled with lacklustre demand for workplaces as flexible working gained popularity have sent the office market into the doldrums for the past three years. Deal flow dwindled to a trickle as major investors held back, waiting for values to stop falling.

But that story is moving in reverse now, as work-from-home arrangements stabilise and more interest rate cuts are anticipated. Top corporate names are scrambling for a spot in the best office towers.

Investa, one of the major private fund managers locally, is investing early into the rebound. In a series of big deals giving it exposure to the office recovery, the mooted transaction will be its biggest yet. It is likely also to become the stand-out transaction this year, setting the benchmark for pricing.

Key components of the deal are falling into place, with Investa locking in two institutional investors: its own unlisted commercial property fund alongside Florida-based BGO, which is one property arm of Sun Life and one of the largest real estate investors in North America.

In play is the 75 per cent stake that Blackstone has accumulated in the well-known Harry Seidler-designed tower at 225 George Street. The 84,000-square-metre tower has some vacancy following the departure of Deloitte.

Keenly anticipated is the investment yield at which the deal will be struck, with premium office towers valued on a yield of about 6 per cent in the current market. At the market’s peak three years ago, office towers were changing hands on yields in the low 4 per cent, signifying higher prices.

The country’s major unlisted office property funds posted their first positive returns in two years in the first quarter. Leading the charge was the $6 billion Investa Commercial Property Fund, with a total return of 2.7 per cent.

The fund owns a portfolio of prime-grade towers such as 60 Martin Place and Deutsche Bank Place in Sydney, 120 Collins Street in Melbourne and 220 London Circuit in Canberra.

Led by Peter Menegazzo, Investa has been busy in recent months extending its fund management business to the office market. It brought in BGO, the same investor in Grosvenor Place, for its first Australian investment, buying an office tower in Sydney’s Bond Street.

It also steered Singapore’s UOL Group into an investment on George Street and recently managed Japan’s Daibiru’s investment into a $600 million tower on King Street, held in the ICPF fund.

Blackstone’s exit from Grosvenor Place has been on the cards for some time, after it initially bought a 50 per cent stake in 2021 for $925 million, before taking control of 75 per cent through a subsequent deal with China Investment Corporation.

The US private equity giant’s focus in Australia are its two biggest investments. The first is Crown Resorts, which Blackstone took private three years ago and is now busy negotiating a gaming sector under much greater scrutiny and weaker demand.