50 Martin Place - An Evolution

Greg Smith, Executive Director, Pepper Property

Greg has worked together with Michael Silman, Head of Corporate Real Estate for Macquarie Group, for over 10 years. Greg and his team were involved in Macquarie’s 1 Shelley Street premises in Sydney and Ropemaker Place in London. Here, Greg discusses the value of independent advice and what the industry can learn from Macquarie’s innovative approach.

For ten years we’ve had the pleasure of working with Macquarie Group, and it’s truly been an evolution. From Shelley Street, Sydney to London and now Sydney’s Martin Place, it’s been an iterative journey for us. In my opinion 50 Martin Place is the next world-class workplace, especially with respect to heritage developments.

Managing a real estate portfolio is often about managing risk, and deciding what level of control best suits your objectives. When undertaking a risk assessment, we work with the client to consider what they require from a landlord and whether they are better served by being a tenant or an owner. Which option is best comes down to how you want to manage your portfolio and what your business objectives are.

The Process

For Macquarie, owning 50 Martin Place allowed them to achieve their business objectives and take full control of the project, and the benefits were seen throughout the development and delivery phases of the project. Risks were well managed and costs were controlled by having direct supervision of the building.

In advising Macquarie, we worked hard to determine the “what-ifs”; assessed what the rent should be and looked at costs - implied, purchase and refurbishment. What we found was that the implied rental cost was quite low compared to market, and the cost of fit-out was also below market, so the overall occupancy costs were highly competitive. Luke Richmond spent many hours doing valuations and weighing up the pros and cons so we could give Macquarie the best possible advice.

A critical success factor for this project was contract management. On large projects with multiple advisors and vendors, clever contract management helps keep costs down – something that is also achievable for a tenant. Imagine you had a third-party developer or landlord who was willing to let one contract with full transparency, so that there was a differentiation between the base build, the base build upgrade and the fit-out? You could then potentially find significant cost savings. It’s also important to discuss risk; what does the tenant want in relation to indemnities? If there is a delay in delivery, what will the landlord provide? What is the tenant required to provide the landlord?

The Outcome

Our thesis is that integrated fit-outs which started off providing discounts to tenants by combining base build and fit-out can, in some instances, deliver cost premiums to tenants. So that can provide a mechanism to gain control without necessarily having the property on balance sheet. However, this means you must have a much closer partnership with the developer or landlord as opposed to the arm’s length relationships that one typically has when there is an integrated fit out.

Macquarie is a very sophisticated occupier and they have an extremely strong grasp of the workplace as an enabler of performance. The team carefully considered the risks they were taking, endorsed the project, championed it and they are now using the property to deliver great outcomes for their clients and people. I believe that this building does this very well.