Offices under pressure as city towers sell for big discounts”

Another A-grade office tower at 40 Miller Street in North Sydney was sold to US global investment manager Barings for about $145 million, at a near-14 per cent discount.

Mitsui Fudosan Australia has taken a 66 per cent stake in Mirvac’s planned office building at 55 Pitt Street in Sydney, but the company did not confirm a start date for the 55-storey tower or if law firm MinterEllison will be a tenant.

Mirvac chief executive Campbell Hannan said the group has delivered on its $1 billion asset sales target, adding further details will be released with its full-year results in August.

Meanwhile, Dexus exchanged contracts on three assets worth $383.2 million in June.

One of those was Sydney’s 5 Martin Place which is half-owned by Cbus Property. The super fund wrested the remaining half share from joint owners Dexus and the Canada Pension Plan Investment Board for $310 million, at a 24 per cent discount.

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“[The] investment metrics displayed by recent sales activity support a softening in office market valuations,” Dexus chief executive Ross Du Vernet said.

“However, as a long-term investor, we have confidence in the value of our high-quality portfolio through the cycle. There is continued occupier demand for well-located, high-quality buildings as seen in our portfolio occupancy,” Du Vernet said.

Melbourne-based Growthpoint’s portfolio is also sliding. The value of 45 of its 57 directly owned assets has slumped $182.4 million or 6.2 per cent. Moelis Australia analyst Edward Day said Growthpoint’s “peak to trough” decline is about 20 per cent.

Newly appointed chief executive Ross Lees said the decrease in the draft external valuations is expected to result in a reduction of 25¢ per share to the group’s net tangible assets.

Citi analysts said the office sector remains “challenging” and is not yet at an inflection point where values will grow.

“Muted underlying tenant demand, corporate cost reductions and high overall vacancy and incentive levels continue to place the growth outlook for the subsector under pressure,” Citi said.

“We also anticipate further pressure on office capitalisation rates into the June and potentially the December reporting periods as inflation and interest rates remain stubbornly high.”

“We see little catalyst for a near term re-rating relative to higher growth subsectors,” the analysts said.