Interesting property analysis in this article.David Uren,...

Interesting property analysis in this article.

David Uren, Economics correspondent | April 04, 2009

Article from: The Australian
THE Rudd Government's plan to rescue the commercial property market could have one of Australia's most prestigious properties as its first customer.

The Macquarie Group is struggling to refinance $128.9 million in debts on No1 Martin Place in Sydney, which houses not only the bank itself but also the Australian Securities & Investments Commission.

Having put the property on the market late last year, market sources say the only offer it has so far received would represent a 22.6 per cent loss on the property's value as at June 2008.

The Government's planned public-private property fund, dubbed "Rudd Bank" by the Opposition, has been designed to stop the fire sales of commercial properties, which it fears will undermine the health of the Australian banking system.

Senior researcher with property analysts BIS Shrapnel, Jason Anderson, said the fund would face a hard decision over whether to take out borrowers at 100c in the dollar as originally intended, exposing taxpayers to a possible loss, or accept that the market had already fallen by around 20 per cent.

There have been no major CBD office property sales since the financial crisis intensified in the second half of 2008.

Head of research with Richard Ellis, Kevin Stanley, said there were only 10 commercial property sales worth more than $100 million last year and most were early in the year and reflected pricing established in 2007, when there were 32 sales.

"There has been a stand-off between buyers and sellers all through last year; and the first quarter of this year is exactly the same, not only in Sydney but around the country."

The Macquarie Group owns No1 Martin Place through two property trusts of which one, the Macquarie Martin Place Trust, must repay its debts by August 30. A disclosure to ASIC (its tenant) reveals that the trust's creditors have the right to sell the assets in the event that the borrower defaults under a loan agreement.

It says the managers are marketing the trust's half interest in the property, but declares: "The current uncertainty in financial markets makes a possible sale more difficult."

The trust is considering alternatives including renegotiation of the debt and raising additional equity.

Market sources say the only offer it has been able to get on refinancing is a two-year loan at 5.5 percentage points above the bank bill rate, making a total interest cost at a little over 9 per cent. This is both too expensive and too short-term. The property's valuation has been cut from $530 million to $485 million, however, the only offer received to date has been at $410 million.

A Macquarie Capital spokeswoman said the trust could not comment on market speculation.

Based on its rental income, the offer would represent a yield of 8 per cent, which would be a dramatic fall in valuations for the top end of the property market. The trust is thus a prime candidate for the property fund being developed by the Government.

Mr Stanley said that yields Australia-wide had risen from 6 per cent, at the market's peak, to 7.6 across all office property to reflect increased financing costs.