Sydney: driving investment Down Under

Is it all just too good to be true? That is the question on the minds of Sydney’s property investors and developers.

The influx of capital into Sydney over the course of the past year has driven values to record highs across all sectors.

With many of the world’s largest global investors looking to diversify their portfolios outside of core markets – and with Australia still having been a faraway backwater for some – Sydney is the obvious first port of call when venturing Down Under.

Largely driven by the financial services sector, which has been resurgent since the global financial crisis, the city is protected from the demise of the minerals sector that is impacting many of Australia’s other major cities.

But no market has been propelled more by the influx of international capital in the city than the luxury residential market. It has been overwhelmingly influenced by Far Eastern and Chinese investors, made up of both end buyers looking to take advantage of the Sydney lifestyle, and developers and investors looking to deploy capital and utilise expertise.

Investors such as Wanda Group, Fosun and Greenland, as well as Ausbao, Vanke and more, are undertaking or looking for opportunities.

The benefits are plentiful. Developing within the Sydney market gives Chinese developers access to a large pool of skilled Asian workers – the most recent Australian census showed 12% of respondents were of Asian descent – and an opportunity to sell the end product back to their home market. The devaluation of the Australian dollar has also been to the advantage of Far Eastern investors.

“Wealthy Chinese people want their children to speak English and that is an attraction,” says Justina Fan, head of outbound investment Greater China at DTZ Cushman & Wakefield. “There is little jet lag as there isn’t much time difference, and the immigration policy is very favourable for China.”

Pushing up prices?

Sydney house prices rose by 19.9% for the year ending 30 September 2015, according to the Australian Bureau of Statistics, and it is estimated that Chinese buyers have accounted for 2% of transactions. But while this has been positive for homeowners and developers, there is a growing underlying resentment against overseas buyers driving up prices, making getting on the housing ladder impossible for first-time buyers.

“Sydney has seen Asian developers buying grade B and C office stock for residential redevelopment and conversion, with some progressing projects this cycle but others waiting for the next,” says Ben Azar, director for capital transactions and cross border investment at Savills.

There has been a mass conversion of office buildings to higher value residential uses. Research by Savills indicates that from 2015 onwards, as much as 2.9m sq ft of office space is expected to be withdrawn from the market as a result of such projects. This is made up of 600,000 sq ft of prime offices and 2.3m sq ft of secondary and worse. 

In turn, this has led to developers having the confidence to replace that old office stock with new projects, and one of the city’s largest ever regeneration schemes is being undertaken by Lend Lease on the western edge of the central business district.

The A$6bn ($4.1bn) Barangaroo South, like many newly established destinations, is a case of so near and yet so far for some. It is only a 20-minute walk from the city’s famous Central Quay but convincing traditionalist agents that it is an area that blue chip tenants should be flocking to is not so straightforward.

“It’s a back-office destination. It’ll get taken up eventually but it’s a huge amount of space to bring to the market at one time. It’s a big call,” says one agent.

That argument does not quite stand to reason though, with the scheme’s three enormous office towers substantially let prior to completion.

The International Towers 1, 2 and 3, designed by Rogers Stirk Harbour + Partners, total 3m sq ft, split almost equally between them. The three buildings total almost the same as the average annual take-up of office space in the whole of Sydney. 

Barangaroo will also include two further smaller office buildings of around 70,000 sq ft each, on which construction will not begin until the towers are further progressed. The three towers are currently around 67% let with Tower 2 the first to complete, having been delivered in summer 2015. Towers 1 and 3 are expected to complete by October and May 2016 respectively. KPMG, HSBC, Westpac and Lend Lease itself have committed to new headquarters in the towers.

Construction began in 2010 and a letting of 65,000 sq ft to Westpac followed in 2012, which gave Lend Lease the confidence to put the pedal to the metal in bringing the three towers forward almost simultaneously.

“We went for it,” says Jonathan Emery, managing director of urban regeneration at Lend Lease. “We started on the first and the interest was such that we saw the market opportunity and benefit of committing to secure the tenants in the market at the time, plus the investor appetite for the product gives you confidence too.”

Build with confidence

While slightly away from the traditional core office market within Sydney, Emery says that to create new destinations, developers have to be confident and build
en-masse. This is a model that has been successful in cities around the world, including London.

“This is just mega. Was Broadgate [in London’s EC2] off pitch when it was built? Probably, but it’s not anymore. You create a whole destination of this quality and you have a whole new pitch,” he says.

“The city still has its traditional heartlands but the buildings there are getting older. You could do a new building piecemeal, but this is a whole new precinct.”

The 18.5-acre site, aside from the dominant business hub, will also include some of the most desirable residences in the country.

Renzo Piano has designed three towers, on which development is yet to start, together known as One Sydney Harbour. Each will be between 190 and 240 metres tall and total 740 flats. The most expensive penthouses will be in the region of $A100m and Lend Lease is projecting values of more than A$5,000 per sq ft. This phase will also include a Crown Resorts casino, owned by James Packer, son of Kerry Packer, the force behind World Series Cricket.

“They will be the highest value homes in Australia – this has never been done before here. It’s unprecedented,” says Emery. “There is huge interest. We have more than 1,000 people registered who have put money down just to get in the queue.”

The confidence exuded by Lend Lease has been justified by some of the most powerful investors globally buying into the scheme, attracted by the rare opportunity to buy something of scale that is newly built in Sydney.

In June 2015, Lend Lease sold a third stake in Tower 1 to Qatar Investment Authority for A$525m. The project was boosted early on in 2012 by an investment of A$1bn by the Canada Pension Plan Investment Board in exchange for a 50% stake in Towers 2 and 3. A combination of Lend Lease’s balance sheet and Lend Lease managed funds currently own the remainder.

“We started off funding it ourselves and sold elements down until we got more and more tenanted. We have different owners in different towers but they are all linked in terms of their objectives for the area,” says Emery. “Building relationships with those kind of partners is something we work very hard on.”

The Sydney market is in dreamland and at the current time is the apple of the eye of the world’s investors. For as long as the global instabilities and the slowdown in the Chinese economy are held at bay, investors are making hay while the sun shines.

Worth talking about

Opportunities to invest in high-quality projects or portfolios of scale are rare because of the relatively small size of the market in Sydney and, more broadly, Australia.   

That is perhaps why the talk of the town has been a company called Investa. Shoot the breeze in any property hangout in the city and it is the only story anyone wants to discuss. 

One senior Investa employee says: “I have to take twice as long to walk from meeting to meeting at the moment because so many people stop me and want to know what’s going on.”

The company was put up for sale in April 2015 by Morgan Stanley and the A$9bn platform was eyed up by a host of investors both domestically and internationally, looking to
tap into the tight market for quality assets and secure a highly-regarded fund management business. 

The different elements of the Investa business have made the process of its sale complex. 

Investa Property Group itself is a fund, investment and asset management business with 230 employees. 

On its own balance sheet, it owned nine office blocks in Sydney, Melbourne and Brisbane valued at A$2.5bn.

Investa also runs the listed Investa Office Fund, which has a A$3.5bn portfolio and a market cap of A$2.5bn.  

The final piece of the jigsaw is the $3bn Investa Commercial Property Fund, which it runs for a variety of institutional investors. 

Investors, among them Mirvac, Blackstone, Brookfield, Cromwell, LaSalle Investment Management and Charter Hall, quickly began circling the group and offers for different combinations of the business were put forward.  

The first part of the process signed, sealed and delivered was China Investment Corporation’s purchase of Investa’s balance sheet assets in July. Mirvac was subsequently appointed to manage the portfolio on its behalf. 

 In February the fund management rights of Investa Commercial Property Fund and Investa Office Fund was bought by the management itself from Morgan Stanley for $92m in the form of a business called Investa Wholesale Funds Management.

However, as Estates Gazette went to press, the listed rival of Investa Office Fund, Dexus, was locked in a takeover battle to buy the assets in the fund. Dexus has been gradually sweetening its offer to buy the assets since December. The current management of the fund is advising shareholders to retain its services and refuse the offer. 

Should the new fund management business lose its role managing the Investa Office Fund, due to a Dexus takeover, half of the purchase price paid for the management rights to Morgan Stanley will be repaid.

The whole process has understandably caused concern for the employees of Investa. With Mirvac now managing the former balance sheet assets of the company under CIC’s ownership and the prospect of Dexus taking over the Investa Office Fund it is perfectly feasible many may soon be out of a job. 

 There are likely to be even more twists and turns to the Investa saga but the feeding frenzy that has ensued over its various parts in the past year is an indicator of the appetite for Sydney assets and Australian platforms. 

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