Turn-Key Finance for Goldfields House

Goldfields House – 627 Chapel Street, South Yarra

Merricks Capital and Icon Construction have aligned to provide Turn-Key Construction Finance for the ~$300 million speculative landmark office tower set to reshape Melbourne’s most fashionable locale.

Designed by Cox Architects, the 24,720 sqm tower is uniquely positioned on an island site, affording future occupiers abundant natural light and sweeping views.

Compared with projects of similar scale, 627 Chapel Street will deliver relatively smaller floor plates at approximately 1,220sqm. The floor area and side core offer greater flexibility, ensuring both larger and smaller businesses can curate a workplace that meets the ever-changing commercial landscape.

The developer, Goldfields Group, has collaborated with several visionaries including architect - Phillip Rowe, technologist - Bruce Duyshart, urbanist – Emma Telfer, and restauranteur – Jean Paul Prunetti. The result is a properly integrated series of spaces from street level, through to the expansive roof-top terrace.

Most importantly, construction is underway and future occupiers can be certain that their workplace will be completed by November 2021.

Turn-Key Finance

In an industry first, Merricks Capital has established a hybrid Turn-Key product together with Icon Construction. The key principles are:

• The Turn-Key provides increased certainty to the developer by removing standard liquidated damages for delay and cost overruns by the builder. This is replaced by a guarantee by the builder and it’s parent company, in this case Kajima.
• The guarantee requires the builder to pay Merricks Capital a fixed daily sum for delays. For the borrower, the finance cost is fixed with the exception of approved extensions of time and variations.
• If the builder completes the project early, it receives the balance of the fixed finance cost; in effect, an early completion bonus.

 Speculative Development

The last round of significant speculative office development in Melbourne occurred in 1990-1992. Back then, the Reserve Bank of Australia was rapidly reducing cash rates from 13% to 5% and10 Year Bond rates dropped to ~6.5% before rebounding to over 10% in the mid 1990’s.

The economy had ground to a halt and office absorption was falling through the floor. Incentives increased to over 40% as the vacancy rate hit ~26% off the back of almost 1 million square metres of new office towers. It took several years to trade through the glut.

By contrast; the cash rate today is 1.5%, 10 year bond rates are ~1.16%, the economy is relatively stable, and prime vacancy is less than 5%. Prime office yield spreads over 10 year bonds continue to track well above the long term average.

Fortuitously, improved governance, and risk management also prevails today.

The inner eastern office market (dominated by Cremorne and Richmond) has proliferated over recent years with demand and rentals increasing. Capitalisation rates have also sharpened, generally between 5.25% - 5.5%, reflecting broader market conditions.

Until 627 Chapel Street is completed, neighbouring South Yarra remains completely undersupplied, and devoid of new quality office towers, despite considerable location advantages.

Non-Bank Lending – Office Development

Non-bank property finance enables developers to potentially commence commercial projects earlier, rather than waiting to secure sufficient pre-commitments to satisfy a trading banks interest coverage ratio requirement (ICR’s).

Unless leasing pre-commitment(s) typically exceed 1.8x ICR, or ~70% of the net lettable area, traditional bank finance is very difficult to obtain.

Office leasing negotiations often require developers to provide date certainty for construction completion. For large scale projects, this means ambiguity during negotiations for any prospective tenant that is smaller than the required threshold.

Non-bank lending can bridge the gap between project commencement and construction completion.

Merricks Capital provides developers with deep domain experience and project understanding, which differentiates our product line across the commercial development sector.