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July 15, 2019

Prime office buildings in Australia’s gateway cities of Sydney and Melbourne typically have multiple landlords because they are highly priced and shared ownership is believed to dilute investor risk.

But with investment opportunities at the top end of the market scarce, co-owners are increasingly exercising their right to either take full control of buildings, or influence their future use.

“In Australia’s highly fractional market, investors are seeing the opportunity to further allocate their capital towards assets considered part of their core strategy,” says Rob Sewell, head of Office Investments, Australia, JLL.

As well as increasing an investors’ exposure to a desired market, for listed property trusts in particular, gaining full ownership allows them to unlock lucrative asset management strategies, including redevelopment, without having to convince a more conservative co-owner.

Co-owners are using their pre-emptive clauses – which allow them first right of refusal over an asset – to buy out the remaining stake either for themselves or on behalf of an aligned partner. These investors can either purchase the share outright, or use a nomination provision to bring in a preferred capital partner.

“Taking advantage of pre-emptive rights when a co-owner is ready to sell is a useful way to continue to allocate capital in this current market environment,” Sewell says.

Pre-emptive terms have been used in a number of recent, major deals.

In March, Dexus purchased the remaining 50 percent stake in Sydney’s landmark MLC centre from GPT in a deal worth A$800 million. The deal gives Dexus full control to progress with a redevelopment of the retail component, as well as cementing its standing as the biggest office landlord in the country.

In Melbourne, the unlisted GPT Wholesale Office Fund opted to exercise its pre-emptive right to buy the remaining stake in 2 Southbank Boulevard after its co-owner Frasers Property Australia divested.

And at 40 Mount Street in North Sydney – Coca-Cola’s Sydney headquarters – ICPF, a wholesale fund managed by Investa, exercised its pre-emptive right over a 50 percent interest and in doing so enabled UK-based fund manager M&G to buy a 25 percent stake. The vendor was PGIM on behalf of South Korea’s National Pension Service.

Why investors want in
Part of the reason investors are turning to pre-emptive clauses is due to the strong demand for prime office assets in Sydney and Melbourne, amplified by uncertainty in the retail sector, and a lack of scalable investment opportunities in industrial.

High transparency and attractive yields relative to other Asia Pacific markets also continues to make Australia’s office markets a magnet for capital, says Sewell.

“With performance in Australia’s office markets so strong, part owners in funds are endeavouring to use their pre-emptive rights to snap up whatever is becoming available, either on their own or with like-minded capital partners,” he says.

Challenges
To the selling co-owner, pre-emptive clauses are not without risk.

There is always a chance that the price initially offered to the buying co-owner is accepted, therefore forgoing the opportunity to test it in the open marketplace where it might achieve a better result.

For investors outside the deal, making a successful bid can be difficult as often a co-owner will also have the last right of refusal to purchase the share.

“Distinct strategies need to be adopted to ensure the best price is achieved for the selling owner,” says Sewell.

Sydney has the highest number of fractional ownerships of any state in Australia, with 53 percent of the 3.1 million square metres of prime grade office stock co-owned.

By comparison, 26.9 percent of Melbourne’s 3.15 square metres of prime grade office stock is co-owned.

Click to read how Australia is luring capital with pre-sale deals.

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Rob Sewell

Head of Office Investments, Australia, JLL

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