ARA, Straits Real Estate Buying Sydney Office Tower for $207M

Straits Real Estate is teaming up with funds managed by ARA Asset Management to buy an office tower in downtown Sydney from a fund run by local investment firm Propertylink for A$275 million ($207.3 million), according to announcements this week by the Australian group and Straits.

The pair of Southeast Asian investors are planning to reposition the 28-year-old 320 Pitt Street as a core office property after the existing tenant leaves, according to Straits. The investment appears to be a bet that Sydney’s buoyant office market justifies an upgrade of the centrally located property.

The reported deal comes less than a week after another downtown Sydney office asset was sold to John Holland, an Aussie developer owned by Chinese giant CCCC.

Singaporean Team Goes for Core in Central Sydney

The property, which is also known as Telstra Plaza, is a 32-storey office tower with 29,159 square metres of net lettable area, according to Straits Real Estate’s statement to the Singapore exchange. Completed in 1989, the building is occupied by Australian telecom giant Telstra on a lease that expires in 2020. The grade B property is located just west of the city’s Hyde Park and is just a short walk north of the Central railway station.

“The investment in 320 Pitt Street is very much aligned with Straits Real Estate’s strategy of redeploying capital into potentially higher return real estate opportunities,” Straits Real Estate CEO Desmond Tang said in a statement. “We see value in this property as it gives us a healthy stream of income via the building’s existing leases.”

The Singaporean duo acquired the office block as a consortium, with Singapore-listed Straits declaring a 26 percent stake in the acquisition, which it made through an Australian subsidiary.

ARA, which completed a privatisation process in April with Straits as a major shareholder, did not make a statement regarding its stake in the transaction, but no other buyers were listed as participating in the deal. The property is reported to have a premium to book value of 12.2 percent and to generate a 40 percent internal rate of return.

Propertylink purchased the building in June 2015 from American billionaire Sam Zell’s Equity Commonwealth, partnering with Goldman Sachs and UK-based property firm Grosvenor Group on the A$200 million ($154 million) deal. Real estate advisory firm JLL was hired this past February to market the property.

Sydney Infrastructure Helps Drive Office Deals

The Straits and the ARA funds are buying a property that is just over a kilometre south of 275 George Street, a commercial site sold to John Holland earlier this week. John Holland, an Australian builder acquired by China Communications Construction Company in 2014, is reported to be picking up the site for over A$80 million ($60 million) and will likely tear down the existing Grade B office tower to make way for a new commercial development.

Sydney’s office market is booming. JLL reported a 6.4 percent average increase in capital values in the first quarter of 2017 compared to the previous quarter.

The city also has  the lowest vacancy rate for grade A space in its downtown since 2008, at 4.9 percent. Office rents in Sydney surged by 22.3 percent year-on-year in the first quarter of 2017, outperforming the rest of the Asia Pacific region. Robust leasing demand and rising capital values are being driven by major new and proposed upgrades to Sydney’s urban core, including the city’s $1.6 billion light rail project currently in progress.