Sydney’s $1.1b retail swap: QVB, Chatswood Chase change hands

Ownership of premium retail centres in Sydney – including the Queen Victoria Building, The Strand Arcade and Chatswood Chase – has changed in an asset swap valued at more than $1 billion between n retail property group Vicinity Centres and Singapore’s sovereign wealth fund Government Investment Corp.
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It is one of the biggest such retail asset swaps and ownership changes in Sydney’s CBD and will significantly increase Vicinity’s CBD-based retail footprint along the eastern seaboard.

In Sydney, the direct exposure to City Centre assets for Vicinity increases from 11 per cent to 15 per cent.

The shopping arcades generate some of the highest sales per square metre per annum in the country.

There will also be a remix of some tenants, although all the assets are predominantly food-based and services, such as mobile phone and accessories vendors, which are resilient to online shopping.

Under the deal, Vicinity will exchange its 49 per cent stake in Chatswood Chase, worth $562.3 million, for a 50 per cent stake in GIC’s Queen Victoria Building, The Galeries and The Strand Arcade, worth $562.3 million.

Vicinity will continue to manage Chatswood Chase and will assume property management of the Sydney CBD Centres on settlement of the transaction.

The Sydney CBD Centres have been prime assets in GIC’s Ipoh portfolio since 2003. Under Ipoh’s property management, GIC has completed several significant asset enhancements including refurbishments, redevelopments and tenant releasing projects.

The yields for each transaction were about 5 per cent.

Vicinity’s outgoing chief executive Angus McNaughton, said the two companies had been in discussions for the asset swap “for a number of months” and that it was a “win-win” scenario.

“It is a very attractive deal for us and will allow us to enter the strong Sydney CBD retail sector. We have a presence in Melbourne with the Emporium and in the Brisbane city, but we have not been in Sydney. This will add to our earnings and footprint,” he said.

“While GIC has done a great job on the assets, we can now add to them with new tenants and a remix of offerings. They were also attractive to us with the new Sydney light rail development which stops in front of them all.”

Known as the “ant track” from Town Hall Station under the QVB and into Scentre Group’s Sydney City Plaza, it is considered the busiest pedestrian path in the country.

“Combined foot traffic through the Sydney CBD Centres is about 60 million people per annum, with visitation from three main, and growing, consumer segments: office workers, tourists and residents, who spent $590 million across the three centres this year,” Mr McNaughton said.

“The Sydney CBD Centres perform at very high levels of retail sales productivity, with specialty sales averaging $23,890 per square metre and specialty moving annual turnover [MAT] growth of 2.4 per cent, while overall MAT growth was 4 per cent.”

Retail analysts have given the deal a tick, saying it will be earnings positive for Vicinity.

Michael Vincent, a property analyst from stockbroking firm CLSA, said the increased CBD weighting would be more resilient despite structural challenges for n retail.

“There will be improved portfolio productivity and MAT growth metrics and will increase Vicinity’s assets under management and will reduce exposure to Chatswood Chase, which we believe is due for a major development in the next 2-3 years which will require significant capital expenditure.”

Vicinity retains 51 per cent interest in Chatswood Chase and, as such, retains exposure to the potential upside from the development. However, the presence of GIC as a capital partner helps remove the risk.

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