Banks are still open for lending to new shiny office buildings

We’re seeing the return of capital from our Office investments made over the past 2-3 years, providing us with real-time insights into the Premium and A-grade markets in key capital cities.

• Last week, the Merricks Capital Partners Fund (the Fund) received full repayment of a $38m loan facility, which financed the construction of an A-grade Office building in the Melbourne suburb of Balaclava, developed by Ninety-Four Feet.
• The six-story building, representing 1.6% of the Fund’s NAV and 5% of the Fund’s total Office investments, was refinanced to a retail bank after achieving commitments to lease 100% of the Net Lettable Area.
• The A-grade Balaclava development, featuring leading sustainability credentials, communal rooftop amenities like pickleball and basketball courts, and a direct walkway to the train station, achieved approximately 20% higher rents than its 2022 valuation. This highlights the demand bifurcation we’re seeing across new versus aged Office stock.
• This tenant-driven demand bifurcation is consistent with other near-completion Office loans in the Fund, representing 18.5% of NAV. A newly refurbished Office space in Auckland’s CBD has achieved rents that are 20%+ above valuation assumptions. A-grade developments in Melbourne and Sydney CBD have exceeded 2021-2023 rental valuation assumptions by over 10%.
• Rising rental income is largely offsetting the valuation decline driven by easing cap rates in new premium office from 4.5% to 5.5%.
• The Fund will see further repayments over the next six months from completed Office with the Fund’s four Office development facilities in Sydney, Melbourne, and Auckland at a weighted average completion of 85%.
• Based on current opportunities in due diligence, the repaid capital will likely lead to a reweighting of the portfolio out of Office and into the Agriculture, Apartment and Infrastructure lending sectors.