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Published 24 April 2013 07:55, Updated 24 April 2013 07:58
A tower above David Jones’ Market Street store would attract prime rents. Photo: Wolter Peeters
It’s helpful to know that David Jones’ chief financial officer, Brad Soller, held the same position at construction group Lend Lease little more than a year ago.
At the retailer’s recent half-yearly results briefing, Soller surprised analysts by mentioning that David Jones’ iconic Market Street store could support a skyward addition with little more than reinforcement of the existing columns.
Based on initial investigations, he said an addition of 20-to-25 floors had a good shot at approval by Sydney City council.
It’s also possible for David Jones to build on top of the other three stores where it owns the land – the Elizabeth Street store in Sydney, as well as the 299 and 301 Bourke Street stores in Melbourne’s CBD – but not as high. Height restrictions in Melbourne’s Bourke Street Mall, and restrictions on towers that cast shadows onto Hyde Park from Sydney’s Elizabeth Street, limit additions at these locations beyond a handful of additional floors.
Developing the air space above all these locations could bring long-term benefit to David Jones shareholders. A tower above Market Street would attract prime rents, whether from residential or office tenants.
Citi estimates such an asset could be worth up to $1.2 billion upon completion and could cost up to $450 million to develop.
Aside from the longer-term shareholder benefit, there are likely to be short and medium-term strategic reasons why DJs is reviewing these options for its real estate assets
Some in property and retail circles believe David Jones will consolidate its dual Sydney stores at Elizabeth Street.
This would make Market Street a pure-play office or residential building.
David Jones recently retained CBRE Australia to evaluate options for its property portfolio, which it values at $612 million.
A consolidation plan would likely result in DJs selling its Elizabeth Street location, believes property analyst with Moelis & Company, Simon Scott.
“I know they’ve said they have no imminent plans to sell either Sydney asset but, down the track, maybe they consolidate their store operations by expanding the retail trading area in one building and then sell the other asset to a real-estate developer,” Scott says. “The biggest property value uplift for David Jones will come from securing approvals for the expansion of residential and/or commercial space.”
Soller has sent a strong message to the market that selling its property is not part of the plan under the present property review.
“The four existing buildings will continue to be owned by David Jones and we will continue to operate our department stores from these sites.”
If David Jones decides to hold on to its property it would be bucking a trend tin retail.
“There are very few owner-occupiers in retail around today,” national director of valuation and advisory services for Colliers International, Dwight Hillier, says.
“Anyone who’s got significant assets on balance sheet are looking to offload them, or they are looking to maximise their potential if they are going to keep them on balance sheet,” he says.
The buyout of David Jones’s rival Myer Holdings in 2006 by TPG Capital was a classic example of how a private-equity buyer can extract value from a retailer that owns its own real estate.
Within a year of buying Myer, TPG had sold the retailer’s flagship property – next door to David Jones’s Melbourne store – for $605 million.
Two years later, TPG had re-floated the company on the Australian Stock Exchange at a value of about $2.4 billion, after using the proceeds of the sale to refurbish the stores, boost profits and strengthen the company’s balance sheet.
TPG is an expert at executing the ‘sale and leaseback’ play – the firm did the same thing when it bought Debenhams department store in Oxford Street in London.
Still fresh in the minds of David Jones shareholders is the mysterious $1.65 billion offer made for David Jones last year by EB Private Equity that sent it’s stock up 15 per cent on the day, but then sent the stock plummeting when there were questions about the legitimacy of the offer.
It’s thought much of the discussion around the value of David Jones’s property has to do with posturing by the retailer to stave off opportunistic buyout firms, that may want to get their hands on the department store’s crown jewels cheaply.
By announcing valuations for its properties, and then flagging its plans to develop its air rights, David Jones is essentially setting a high bar for any buyout firm that wants to bid.
David Jones’s $612 million valuation of its property alone equates to $1.15 per share – throw in the elaborate air-rights development that Citi estimates could be worth $1.2 billion, and that number pushes further towards its present $2.90 per share price. Not bad for a stock currently trading at $2.96.
Property owners, more than ever, are looking for ways to build upwards – this is particularly true for retailers such as David Jones that are under pressure to get better returns on their assets.
Gerry Harvey, founder of electronics retailer Harvey Norman, just announced his plan to leverage the real estate he owns and build a 12-storey office tower above a Harvey Norman Domayne store at Macquarie Park in Sydney, including a six-storey commercial building and a 27-storey hotel and apartment tower.
The calculation of airspace that can be used for development varies based on the particular site, but essentially, owners can apply to the city council for the rights to develop up, and will be allowed a certain additional floor space ratio based on the size of their existing site.
With very few new development sites left in the CBDs, particularly in the highly concentrated Sydney city centre, developers will increasingly be looking to fill the air up there.
Photo: Wolter Peeters
Photo: Lee Besford
Photo: Sahlan Hayes