Hong Kong’s Link REIT Pays $428M for Half-Stake in Oxford Properties Aussie Portfolio

Hong Kong’s Link REIT has agreed to make its second Australian investment in just over two months, with Asia’s largest real estate investment trust announcing today that it is investing A$596 million ($428.2 million) for a 49.9 percent stake in a portfolio of office assets in Sydney and Melbourne.

The Hong Kong-listed giant is purchasing the stake in the Investa Gateway Office (IGO) venture from Canada’s Oxford Properties Group, with Link REIT positioning the deal as a bet on future demand for high-end corporate homes for businesses in Australia’s largest cities as the trust grows beyond its traditional markets in Greater China.

“IGO is one of the highest quality Australian office real estate portfolios to be offered to the market in recent years,” said Link chief executive officer George Hongchoy in a statement. “The Australian economy has been highly resilient and the investment in one of its highest quality prime office portfolios provides immediate scale, positions us strongly for the next cycle and aligns with our Vision 2025 growth strategy of diversifying and improving our portfolio mix in the region.”

The IGO venture, which Oxford Property Group, the real estate investment arm of pension fund Ontario Municipal Employees Retirement System, had established through its partnership with local fund manager Investa, owns stakes in five office assets measuring a total of 187,148 square metres (2 million square feet) located in the central business districts of Sydney and Melbourne, according to Link REIT’s announcement to the Hong Kong exchange.

High-End Australia

The transaction values the IGO venture, which fully owns 151 Clarence Street and 347 Kent Street in Sydney, as well as holding half-stakes in 388 George Street in Sydney and 567 Collins Street in Melbourne, along with a quarter-interest in 125 Phillip Street in Sydney, at A$2.3 billion.

The portfolio achieved revenue last year of A$71.6 million and total income of A$206.2 million, according to unaudited accounts cited in the statement. Net passing income from Link REIT’s share of the portfolio as of 31 December was A$49.6 million, with the trust’s stake in the portfolio valued at A$1.13 billion in an independent valuation by Colliers. Those figures put the transaction at a 4.38 yield and Link will fund the acquisition through internal cash resources and debt facilities.

With the five buildings having achieved average occupancy of 92.6 percent with 70 percent of its tenants coming from the professional and financial services sectors, Link REIT expects stable income from leases which have a weighted average lease expiry (WALE) term of 5.8 years, with automatic annual rate increase built into the agreements.

All five properties in the portfolio have achieved 5-star or better ratings under Australia’s NABERS system for sustainable buildings, with Link REIT counting on the high-end nature of the portfolio to sustain tenant demand as employers rush to bring their teams back to the office after Australia’s extended lockdowns.

“With the prime locations of the Portfolio Properties and premium asset quality, the Portfolio Properties are well positioned to benefit from the emergence of the current “flight to quality” trend for office occupiers which is partially driven by the COVID-19 pandemic,” Link REIT said in its statement.

In a statement today, credit agency S&P Global Ratings noted that while the acquisition, which is expected to be completed within the first half of this year, will involve Link REIT taking on more debt, it also helps spread the trust’s holdings beyond its traditional focus in Hong Kong and mainland China, with the agency retaining its A rating for the REIT.

“Link Real Estate Investment Trust’s proposed acquisition in Australia will strengthen its overseas presence and moderately diversify its portfolio,” S&P said in the announcement, while adding that it expects Link REIT, which has now purchased five assets in the last 12 months, will continue to be active in the market.

Stocking Up in Sydney and Melbourne

Link REIT, which purchased 100 Market Street in Sydney as its first Australian asset in early 2020, and last month announced its hiring of Sydney-based Greg Chubb as its chief operating officer for international, has built up a favourable impression of the value available in top office assets in the country.

“We already have one asset, 100 Market Street in Sydney, which we’re very happy with,” said Eric Yau, chief strategy office for Link REIT. “We bought it just before COVID, and it has endured through COVID with very resilient tenants.” In November of last year Link REIT had agreed to pay A$532.8 million to buy a set of three Sydney retail properties from the real estate division of Singapore’s GIC.

Speaking to reporters, Yau and Hongchoy noted that Australia’s top office markets have maintained nearly 100 percent rental payments through the pandemic, and are now poised for fresh growth. The investment in 567 Collins Street also gives Link REIT its first presence in Melbourne.

In a report published last month, Investa noted that Australia added 165,000 office-based jobs in the 12 months through August 2021, whiled adding that prime face rents have emerged from COVID largely unchanged, at the same time that corporate profits in Australia increased by 14 percent in the 18 months from March 2020.

“The Sydney and Melbourne office occupier markets are exceptionally well placed and are now very much returning to growth, particularly for high quality prime office space,” said Stuart McCann, head of international capital for Pacific and Southeast Asia at CBRE, which advised on the transaction. “This is happening at a time when both the Sydney and Melbourne office markets have one of the lowest supply outlooks in 2022-2023 of any mature, gateway office market in Asia Pacific.”

New Partners

Oxford Properties, which just last month introduced former Blackstone executive Alessandro Fiascaris as its new head of investments for Asia Pacific, had acquired the 19-asset Investa portfolio through an A$3.4 billion privatisation of the formerly ASX-listed investment firm in 2018, after a fierce bidding war with Blackstone. After selling off a number of non-core properties, in 2020, the Ontario-based fund manager followed up by purchasing a half-stake in Investa Office Management from Macquarie’s MIRA Real Estate, with the Aussie firm retaining the remaining 50 percent.

Following the Link REIT transaction, Investa Office Management will continue to manage the Investa Gateway Office venture.

Since the purchasing the original Investa portfolio, Oxford Properties has continued to develop and acquire Aussie commercial assets, including having set up a joint venture with Mitsubishi Estate last year to develop a 47,800 square metre office project named Parkline Place at the intersection of Pitt and Park streets in Sydney’s CBD. The Canadian firm, which was reported to be seeking a capital partner for the Investa portfolio in mid-2021, sees both its tie-up with Link REIT and its ongoing expansion in Australia as endorsements of its investment strategy.

“Leveraging Investa’s Australian office management expertise, we have created significant value and achieved a high performing de-risked portfolio,” said Alec Harper, Oxford’s Head of Australia. “Following on from the recent investment by Mitsubishi Estate into our Parkline Place project, today’s transaction further demonstrates the continued global institutional demand for prime and highly sustainable office product.”

Harper said that Oxford Properties will redeploy the proceeds of the portfolio sale into its develop-to-core office pipeline as well as for its build-to-rent residential program in Australia. In June of last year, Oxford launched a rental residential platform under the Indi brand name, with the firm announcing in December that it had teamed with Melbourne developer PDG Corporation for a 434 unit worker housing tower in Sydney’s Southbank area.