Large deals drive $14.3 billion in office market investment

Large deals drive $14.3 billion in office market investment

15 November 2019

Large deals have dominated investment activity in Australia’s office market over 2019 to date, with Sydney accounting for the majority of these transactions, according to the latest Knight Frank research.

The Capital Markets Insight found office property investment volumes totalled $14.3 billion at the end of September, compared to $12.7 billion for the same period last year.

Investment levels by the year’s end are expected to be around the record level seen in 2018, but large deals have played a greater role than normal in driving activity this year, said Ben Burston, Knight Frank Partner and Chief Economist.

“Investment volumes for deals greater than or equal to $200 million has totalled $8.4 billion in 2019 to date in Australia, accounting for around 60% of deals, which is a historically high share, and significantly higher than the $4.8 billion and $6.1 billion recorded for the same period in 2018 and 2017 respectively,” he said.

Mr Burston said geographically, the run up in large deal activity has been most pronounced in Sydney.

“Investment volumes for $200 million-plus deals in Sydney totalled $5.5 billion over the nine months to September, accounting for 66 per cent of the $8.4 billion total,” he said.

“Sydney’s investment volumes for large deals to date in 2019 are the third highest this decade after 2012 and 2018, when they accounted for 79 per cent and 67 per cent of deals respectively over the whole year, and significantly higher than the average share of 54% since 2010.

“Outside Sydney, the increase in investment activity for larger deals has not been as marked but has still been solid in 2019, with transaction volumes currently running slightly ahead of the record levels seen in 2017.”

A number of notable large deals in 2019 have boosted investment activity in Sydney including:

• Blackstone’s acquisition of the Scentre Portfolio ($1.5 billion)

• GIC’s purchase of a 25% stake in Lendlease International Towers Sydney Trust (circa $1 billion)

• Charter Hall’s acquisition of a 50% stake in Chifley Tower ($900 million) and 201 Elizabeth Street ($630 million)

• Dexus’ purchase of a 50% stake in the MLC Centre ($800 million)

• GPT’s acquisition of a 25% stake in Darling Park Towers 1 and 2 ($531 million)

• Arrow and Starwood’s acquisition of Zenith Towers ($438 million)

• Investa’s purchase of a 50% stake in 135 King Street ($340 million)

In Melbourne, deals contributing to the rise in larger transactions included:

• Dexus’ acquisition of the office component of the 80 Collins Street development ($947 million)

• Charter Hall’s purchase of 242 Exhibition Street ($830 million)

The Knight Frank research found investment activity for deals less than $200 million in the Australian office market has been more subdued, with transaction volumes totalling $5.9 billion over the nine months to September, compared with $7.9 billion for the same period in 2018 and $9.2 billion in 2017.

Mr Burston said the higher activity in large transactions in the office market reflected a desire among many institutional investors to boost their exposure to the Sydney and Melbourne office markets further as interest rates fall.

“Capital growth for office property assets has moderated from elevated levels, but lower interest rates are likely to drive further yield compression, prolonging the property price cycle. This is driving demand, and recent large deals reflect a desire to rebalance portfolios ahead of this next phase.

“At the same time, some private and smaller investor groups have been impacted by a tightening of credit availability, and this has reduced liquidity for smaller and mid-sized deals over 2019. However, if the economy recovers as anticipated in 2020, sustained capital growth and improving confidence are likely to spur a return to higher levels of liquidity in this size bracket.”