China Investment Corporation, the world’s fourth-largest sovereign wealth fund, has moved into pole position for Morgan Stanley’s $8.9 billion-backed Investa Property Group, even as rival suitor Cromwell Property Group strengthens its consortium with the inclusion of the Future Fund.
Australia’s $117bn sovereign wealth fund has thrown its weight behind Cromwell’s tilt by offering a higher-yielding mezzanine loan, alongside one of Australia’s largest superannuation funds, First State Super.
The final configurations for the Investa assets emerged as Morgan Stanley and its adviser, UBS, started to sift through second-round bids after yesterday’s midday deadline.
Investa’s chief drawcard is its directly held portfolio of office towers, which have a face value of $1.9bn but may fetch close to $2.4bn, implying a net yield of between 5 per cent and 6 per cent.
Competition for the assets has been red hot since the race began in February, with close to 50 parties expressing interest in the first round.
That figure has been whittled down to five contenders, and after an exhaustive period in due diligence, the contest will near a close early next week when one or two parties will enter into exclusive negotiations.
The decision could trigger further jostling in the field.
According to sources the consortia in this latest round may separate if that delivers a competitive edge.
So CIC, which has joined forces with LaSalle Investment Management, may shed its partner if the Chinese fund wins a bid for Investa’s directly held portfolio but falls short on the management platform, which is expected to fetch well over $180m.
Citi is advising the LaSalle-CIC group.
According to sources, China’s state-backed investment vehicle, which also holds a substantial slice of the warehousing landlord, Goodman Group, has been keen to achieve scale in Australia’s commercial property market for some time. Its acquisition of Investa would represent a coup for Morgan Stanley, which picked up the business in 2007, shortly before the global financial crisis struck, and would potentially wipe out the loss that investors in its MESREF VI fund were facing at the start of this sales process.
But the falling Australian dollar, combined with sinking long-term interest rates — both compounded in recent days by Greece’s escalating debt crisis — has helped lift demand.
Investa’s high occupancy rates and its exposure to Australia’s most populous cities, has also been a factor.
Blackstone, the New York-based private equity firm, was initially touted as the strongest contender for the business.
As DataRoom revealed earlier this year, the buyout fund has teamed up with Mirvac in its tilt for Investa. It is understood Blackstone is not in negotiations with CBRE.
Another favourite, Brookfield, has also fallen in the rankings. The Canadian heavyweight had been attempting to assemble a special vehicle to hold the Investa assets, but it’s understood the focus has weakened over the past week.
Its slackening appetite has been attributed partly to its surprise $8.8bn takeover play for Asciano, launched last week.
The Goldman Sachs-advised Dexus consortium has also run hard at Investa. The listed office landlord, headed by Darren Steinberg, has enlisted the support of the Middle Eastern fund, ADIA, along with two Asian funds, according to sources.
But Dexus’s tilt may be hampered by fears of its widening grip on the office sector.
Morgan Stanley initially wanted to offload the business to one bidder. But to achieve that aim, the suitors will need to win the backing of Investa’s two subsidiary funds, the listed IOF and its unlisted stablemate ICPF.
This article first appeared in The Australian Business Review.