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Investors and analysts turn bearish on banks

Australia’s banks have been on a tear in recent months, catching a tailwind from the so-called “Trump” trade that enabled one major Australian lender to outperform the soaring US banks which have helped drive indices like the Dow and S&P500 to record highs.
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But this month, a period of extraordinary investor returns appears to have dramatically come to an end as the entire Australian banking sector was heavily sold down – and analysts and fund managers are less than hopeful a recovery is in sight.

Between November 8, the day of the US election, and May 1, NAB soared 29.8 per cent. CBA rose 21.4 per cent, ANZ added 21.9 per cent, while Westpac rose a more modest 16.7 per cent.

None of the banks most directly affected by the US administration matched NAB’s spectacular performance up to the start of May.

JPMorgan gained 24.3 per cent over the period, Goldman Sachs rose 23.6 per cent, while Morgan Stanley added 28.3 per cent. Another similar bank, Wells Fargo, was hit with a lending scandal and so rose only 19.6 per cent over the period.

This is despite the US banks being far more exposed to the reflation trade, as well as US President Donald Trump’s unwinding of the Dodd-Frank regulations in February. The partial repeal pushed Goldman Sachs to a record high, but it has declined since. Local investors didn’t expect the changes to significantly feed through to Australian banks.

Since the start of May, Australia’s big four banks have lost ground, shedding a combined $50 billion in market capitalisation and between 7.2 per cent and 13.7 per cent off their share prices as they went ex-dividend, were hit by a banking levy in the budget, new macroprudential regulations and as ANZ’s earnings disappointed.

The rapid pace of the decline, JPMorgan’s equities team wrote, is surprising, but even after it the banks are not necessarily at fair value.

The big four don’t tend to do well in May, losing on average since 2000 1.6 per cent over the month. But that hasn’t stopped them surging the rest of the year before.

Two and a half decades without a recession and a decline in local interest rates “created a fertile backdrop for Australian banks to outperform both global banks and the broader Australian market”, wrote UBS equity strategist David Cassidy this month.

Since 1997, the MSCI World Bank Index, from a base of 100, hovers just above 200 index points. Australia’s banks are almost touching 1400 index points.

Peak performance in the Australian banks, Mr Cassidy wrote, was actually around the April bank reporting season in 2015. But since then, the bank bull market has proved “surprisingly stubborn”.

“Australian banks seem to have hitched a ride on the global banking rally which began in mid-2016 as bond yields started to inflect upwards. This is despite no direct benefit on Australian banks from a steeping yield curve.”

But looking ahead, Mr Cassidy is one of many analysts who now expect bank performance to decline. “Banks appear a ‘market performer’ at best from here … Headwinds and clouds seem to be accumulating”.

JP Morgan’s equity sales team wrote that “caution around house prices and impending APRA capital requirement announcements could see the sector needing to look optically cheap to increase interest on the long side”.

Many fund managers are also cautious on the sector.

The big four banks, which together comprise over a quarter of market capitalisation of the S&P/ASX200 index, are favourites with income-investors by virtue of their high dividends. But the bank levy, two of the banks said on Monday, would hit dividends – a view also expressed by many fund managers.

In his monthly note, Contango Asset Management chief investment officer George Boubouras said investors could still rely on high payouts from the banks, which in absolute terms would continue to be attractive. But “investors should simply expect that initially the growth of dividends will slow at first before we eventually see a dividend cut in the years ahead”, he wrote.

The big four have recovered somewhat in recent days, but Katana Asset Management portfolio manager Romano Sala Tenna said the “opportunistic buying” was unlikely to signal a recovery. “I’d suggest the balance of probabilities is still weighted to the downside,” he said.

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Melbourne’s unloved Harbour Town to get $150m makeover

Sydney boutique bank Ashe Morgan, has unveiled a new $150 million entertainment precinct for Harbour Town, on the edge of Melbourne’s Docklands.
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A new cinema and supermarket, designed to complement the 120-metre-high Melbourne Star ferris wheel and the Arena ice skating rink, is hoped to reinvigorate the precinct, which is plagued by strong winds and weak crowds.

Ashe Morgan principal and founder Michael Moss said the evolution of Harbour Town had not progressed as quickly as he would have liked since the group’s $150 million purchase in 2014, but he was confident of success.

“Nothing is ever as fast as you would want it to go but we can see the future. I see similarities to Darling Harbour 25 years ago, which was empty and windswept, but with a bit of love and attention and capital it can change,” Mr Moss said.

Darling Harbour, a shopping and tourist precinct built on a revamped wharf on Cockle Bay in the centre of Sydney, was opened in 1988 and struggled for an identity for many years.

“Our investors are with us. They like the place and the long-term strategy.”

“The demographics of this place are unlike anywhere in Australia. Two million people living within 20-25 minutes of this location,” Mr Moss said.

A new Woolworths supermarket and a fresh food market, covering 10,000 square metres, will round out the final stage of the revamp, complementing the Costco hypermarket.

“We think the concentration of the retail offer will make it a much stronger shopping destination,” Mr Moss said.

The area also suffers from strong winds from the south and the east but new roofing and strategically placed buildings and walls are being constructed to shield Harbour Town and create a sheltered piazza, he said.

The centrepiece of the new redevelopment will be an eight-screen Hoyts cinema next to Costco boasting Christie laser projection, Dolby Atmos sound and motorised reclining seats. Two of the auditoriums will be fitted out with the “Hoyts Xtremescreen”, with 24-metre-wide screens.

FunLab, the owner of Strike bowling alleys and Holey Moley mini-golf, will also open in the precinct, along with hawker-style restaurant 8EightStreet and pancake house Route 66.

Singapore-based SC Capital Partners paid $146 million for a 50 per cent stake in the 40,000 square metre project just one year after Ashe Morgan bought the precinct from ING Real Estate.

The precinct struggled for years, plagued by the Melbourne Star’s safety problems and the poorly located discount shopping arcade.

A swanky theme park with roller coasters was once the headline plan for the western corner of the Docklands urban renewal project. Redevelopment of the 146-hectare docks area started in 1997 and is two-thirds finished.

Investment worth $12 billion has been pumped into the CBD-fringe suburb, including massive office and residential towers.

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SurfStitch faces $100m class action over share wipeout

Online fashion retailer SurfStitch is facing a $100 million class action launched on behalf of shareholders whose investments have been wiped out by the troubled company’s plunging share price.
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Quinn Emanuel partner Damian Scattini said the law firm filed the open class action in the Supreme Court of Queensland on Monday on behalf of anyone who bought or held SurfStitch shares between August 27, 2015 and June 9, 2016.

The action accuses SurfStitch of misleading and deceptive conduct and breaching its continuous disclosure obligations over comments about the future of the business that it claims led the market to believe the shares were worth more than their true value.

SurfStitch said in a statement to the ASX on Tuesday that it had not received any claim or other communication relating to the class action.

SurfStitch listed at $1 in late 2014 and was trading at a record high of $2.09 in November 2015. It shares had fallen 90 per cent to 22?? by June 2016 following three profit warnings.

Mr Scattini said SurfStitch’s decline had been a “tragedy” for the many “mum and dad” investors who bought the company’s pitch of becoming the Amazon of surfwear, with about $500 million of shareholder value eroded.

The statement of claim says SurfStitch on several occasions told the market it expected earnings before interest, tax, depreciation and amortisation (EBITDA) of between $15 million and $18 million in 2015-16.

These claims were made without reasonable grounds, the claim says. It also accuses SurfStitch’s board and management of failing to appropriately disclose to the market that EBITDA would be lower than forecast.

In August, SurfStitch revealed an EBITDA loss for 2015-16 of $18.8 million, and a statutory EBITDA loss of $139.1 million, sparking a sell-off that cut its share price in half.

Mr Scattini said Quinn Emanuel would investigate what assets SurfStitch had and look into cross-claims against directors and auditors, which was KPMG in the relevant year. The action will be funded by Vannin Capital. iFrameResize({enablePublicMethods : true, heightCalculationMethod : “lowestElement”,resizedCallback : function(messageData){}, checkOrigin: false},”#pez_iframeA”);

Yet another earnings downgrade on Monday sent SurfStitch shares plunging around 30 per cent to a record intraday low of 6.9??, before closing 23.5 per cent down at 7.5??. The company said it now expected to report an EBITDA loss of between $10.5 million and $11.5 million this financial year, double its previous forecast of a $5 million to $6.5 million loss.

The shares had fallen another 6.6 per cent by Tuesday afternoon.

The business has been in turmoil since Justin Cameron, its co-founder and CEO, unexpectedly quit the business in March last year to weigh up a privatisation bid.

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Goodman Group restructures debt, wins a ratings upgrade

Goodman Group has restructured its capital management with a reduction in gearing and amended US based banking covenants, the group has revealed.
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This has led to an improvement in credit rating from both S&P and Moody’s Investors Services.

According to the chief executive Greg Goodman, these changes provide the group with greater operational and balance sheet flexibility for the long term.

“As part of the Group’s capital management strategy, Goodman has been focussed on reducing our financial leverage in the business to counterbalance our active earnings,” Mr Goodman said.

Under the changes, Goodman has reduced its gearing targets in its Financial Risk Management Policy (FRM) from 25-35 per cent to 0-25 per cent. Mr Goodman said the change brings the FRM in line with the group’s current operating practice.

Mr Goodman said the level of the group’s gearing will be “determined with reference to the mix of earnings and credit ratios consistent with the rating of the group”. There are no changes to the forecast 2017 financial year operating earnings of the group, of 7.5 per cent.

Moody’s vice president and senior credit officer, Maurice O’Connell, said of the news: “Goodman’s revised gearing policy will result in a stronger credit profile through the cycle, which underpins a higher rating.”

“The rating reflects Goodman’s strong market position and brand name as the largest owner of good-quality industrial properties in Australia and its market-leading position globally. This situation helps underpin the Baa1 rating,” Mr O’Connell said.

But the stock has had some mixed reviews with Credit Suisse issuing a downgrade to neutral, based on the fact it is trading 6 per cent below the analysts’ target price.

But the analyst added that Goodman is the most obvious “winner” from the growth of online retail globally, and in particular Amazon’s flagged entry into the Australian market.

It has been said Goodman is in discussions with Amazon to lease its first fulfillment centre at the Oakdale industrial estate at Eastern Creek Sydney. The site is already home to DHL which is a key delivering group for parcels.

“If we assume that Goodman is awarded two of our three assumed 90,000-square-metre distribution centres, this implies about $300 million of additional Goodman Australian development work, versus Australian Work In Progress of about $630 million, as at December 31, 2016,” Credit Suisse analysts said.

“Over the longer term – and as we have highlighted in previous research, we would expect Goodman to benefit from supply chain reconfigurations by existing retailers adapting to meet a new competitive threat.”

The analyst at CLSA, Sholto Maconochie, has maintained his buy recommendation, saying he likes Goodman due to the favourable thematics associated with the e-commerce trend and as traditional retailers focus on supply chain efficiencies and online channels/sales.

“This should see work in progress being elevated at or above the current $3.5 billion across 16 countries. We believe Goodman is Amazon’s preferred developer for its rollout in Australia which we estimate could be 1.0-3.6 per cent accretive to 2018 earnings per security, with Amazon currently Goodman’s second-largest tenant,” Mr Maconochie says in a recent note to clients.

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Zara commits to Australia as sales jump

Spanish fast-fashion chain Zara will continue to support its Australian operations after the offshoot posted another year of double-digit sales growth.
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Zara sells clothing, footwear and accessories and is among the highest-profile international fashion chains to enter Australia in recent years.

It began trading here in April 2011 and had grown to 18 stores and almost 1700 employees by the end of January this year.

Zara generated $256.36 million in sales during the year to January 31, its accounts show, thanks partly to three new stores in the Sydney suburb of Parramatta, the Gold Coast and Brisbane. The accounts suggest Zara increased its staff numbers by 600 over 12 months.

The $256.36 million sales figure was a 15.5 per cent improvement on the previous year’s $221.95 million – strong growth in the tough apparel market but a slowdown on the previous year’s growth of 24 per cent.

But the company’s profit fell to $10.3 million, from $15.26 million previously, accounts filed with the Australian Securities and Investments Commission show.

Furthermore, the accounts show that Zara’s net profit as a percentage of sales has fallen to 4 per cent from 6.8 per cent over the past two years.

This was better than the likes of Swedish fast-fashion chain H&M but inferior to many Australian retailers, one retail executive said.

Group Zara Australia is 90 per cent owned by its Spanish parent, Inditex, and 10 per cent by Peter Lew’s International Brand Management. Peter Lew is the son of billionaire rag trader Solomon Lew.

Inditex and Mr Lew’s company last financial year enjoyed $55.6 million in dividends from the Australian business.

These dividends, and $51 million in inter-company loans due next January, led to a blowout in Group Zara Australia’s net current liabilities to $56.8 million.

“The continuity of such ordinary activities is dependent upon the continual financial support of its parent entity, Inditex SA (the parent entity),” the accounts state.

“The parent entity has committed to continue providing such support to the company for the forseeable future.”

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Lloyd Williams sells city car park to Hong Kong investors for $120m

Property tycoon and horse racing identity Lloyd Williams has more than doubled his money with the sale of a 16-storey carpark in Melbourne’s Flinders Street to a Hong Kong private company for about $120 million.
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The multi-storey car park at 114 Flinders Street is the first Melbourne asset acquired by HK Realway, a family-run Hong Kong property investment business headed by Ling Wong and Yun Choi.

The building has a height restriction on the land title preventing it from being developed and intruding on the views of top-end tenants in the upmarket 101 Collins building located behind in Collins Street.

Market sources say 114 Flinders fetched around $120 million, selling on unconditional basis with no due diligence on a yield around 5 per cent.

It includes an 864-space car park and offices leased by the Australian Housing and Urban Research Institute and Consulate General of Rwanda among others.

Mr Williams has held the property under a company called Cavehall after purchasing it for $54.5 million 10 years ago.

CBRE’s Mark Wizel, Kieran Pillai, Lewis Tong and Knight Frank Martin O’Sullivan handled the transaction.

Eu Ming Lim of Thomson Geer Lawyers confirmed his client HK Realway acquired the asset shortly after the close of a competitive bidding process last Friday.

HK Realway has been quietly building a property portfolio in Australia.

They own several properties in Sydney, including an office tower at 140 Arthur Street that was purchased from fund manager CorVal for $58 million two years ago, the Cinema Centre Car Park in the CBD and another office tower at 309 George Street they purchased for $112.3 million.

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G8 Education taps investors for $100m

G8 Education is tapping investors for $100 million through a fully underwritten institutional placement to fund growth opportunities and reduce debt on the same day the company’s long-time boss Chris Scott has announced his retirement.
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In a trading update, the childcare centre owner also said it has terminated the second tranche of the placement with the Chinese group CIPI, part of G8’s previous plans to expand into China.

The deal comes as property investors have ear-marked the childcare sector as one of growth, with more than $120 million worth of properties bought in the past year.

“Following a review of the market, G8 has elected, at this time, not to pursue any opportunities in relation to the early education sector in China,” managing director Gary Carroll said.

“It was surprising and disappointing that CIPI did not fulfil its payment obligations under the share placement.”

CIPI settled tranche 1 in February, which equalled $63 million, but has reneged on tranche 2, which amounted to $149 million

The G8 directors have now amended tranche 2, with CIPI now committing to subscribe for 8.2 million shares at a price of $3.88, representing $31.8 million of proceeds to G8. Settlement is expected to occur before 20 July, however, if CIPI fails to settle by that date G8 has the right to sell tranche 1 shares to satisfy the settlement.

The placement price, underwritten by UBS and Ord Minnett, will be determined via a variable price bookbuild with a floor price of $3.10 and a maximum price of $3.20, which represents a discount of 7.2 per cent to 10.1 per cent.

Mr Carroll said the funds raised will strengthen the balance sheet through repayment of the $50 million bond as well as the $40 million drawn under the Bankwest working capital facility.

It will also partly fund the committed child care centre acquisitions in Australia as announced in February. These acquisitions total about $200 million and are expected to settle between now and mid???2019.

According to brokers at Petra Capital, on a rolling 12-month basis G8’s like-for-like occupancy as at the end of April was 77.7 per cent, down 3.4 per cent from the prior corresponding period due to industry supply increases, weaker demand in select markets and centre???specific issues.

The impact of lower occupancy has been offset by price increases as well as strong cost control which, through active management, have resulted in an improvement in underlying earnings margins.

“The pace of acquisitions has been slightly impacted by some delays in development processes, with the resulting EBIT impact from 2017 acquisitions now expected to be about $4 million below the previously stated $7 million forecast,” the brokers said.

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Charter Hall snaps up Dexus site for $229m

Charter Hall’s Prime Office Fund and Direct Office Fund have extended their joint venture with the exchange of contracts with Dexus Property to buy the office tower at 105 Phillip Street, Parramatta, Sydney, for $229 million.
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The property is a fit-for-purpose, 25,000 square metre A-grade office tower that has been pre-committed on a 12-year lease with Property NSW. As part of the sale agreement, Dexus is responsible for delivering the development and will be the property manager for five years after its completion in mid-2018.

The Bates Smart-designed tower will be the new home of the NSW Department of Education when it moves out of the Lands and Education Buildings, collectively known as The Sandstones in Bridge Street, Sydney. Built Pty Ltd will construct the new asset with a 5-star NABERS Energy and 4-star NABERS Water rating as well as a 5-star Green Star rating.

Alongside the new asset, Charter Hall is also a large developer with its $220.5 million 1PSQ, which is the first project to begin construction as part of Parramatta City Council’s Parramatta Square vision.

The facility will be the new CBD campus of Western Sydney University and includes 14 levels of A-grade commercial space over 26,500 sq m.

Adrian Taylor, the group executive – office at Charter Hall, said the opportunity to acquire this asset “is consistent with our strategy of acquiring assets with a long weighted average lease expiry (WALE), leased to strong tenant covenants underpinning high-quality cash flow in strategic locations”.

“The market is extremely competitive for high-quality long WALE investment assets, particularly leased to blue chip tenants,” Mr Taylor said.

“We see this investment, which extends our relationship with the NSW government as a tenant customer, as an exciting opportunity to create another landmark office tower in Parramatta CBD, which will benefit from significant infrastructure upgrades and which is proving to be increasingly attractive to tenant customers.”

The sale is the remaining 2017 trading property asset from Dexus and alongside Parramatta, other trading projects that have been sold and contribute to the financial 2017 trading profits include 57-65 Templar Road, Erskine Park, which settled on July 1, last year and 79-99 St Hilliers Road, Auburn, which settled on January 31 this year.

In Melbourne, Dexus has received a planning permit for a residential scheme at 32 Flinders Street, which is currently a car park.

According to a new report by PricewaterhouseCoopers (PwC), Parramatta’s economic growth is set to almost double over the next five years and the city is on track to become a leading financial hub.

The Parramatta 2021 report, commissioned by the City of Parramatta, found the economy of Sydney’s dual CBD will grow by $7 billion by 2021, to $30 billion.

Knight Frank leasing director Tom Bartlett said with an overall vacancy rate at Parramatta of only 4.3 per cent and no direct vacancy at all in prime-grade stock, average gross prime rents have increased 5.6 per cent during the past 12 months to average $580 per sq m or $469 per sq m net. Incentives have continued to fall across the board, down to 18.4 per cent from 21.5 per cent a year ago.

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Australians targeted by Amazon spam scam

Australians have been targeted by scammers purporting to be the retail giant Amazon and promising them $500 Amazon vouchers.
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The scammers used Amazon’s well-publicised expansion into Australia as a hook.

???People at the weekend received a legitimate-looking email offering $500 Amazon vouchers to those who clicked on a link and provided feedback on the company.

The email’s subject line was, “Amazon Card for you. Confirm before it expires.” The email featured the Amazon logo, and a cartoon of a man holding a clipboard in front of a bus, with an arrow and the words ‘Confirm my voucher’ running across the picture.

The email says the “expansion of Amazon into Australia is fast approaching. We will soon begin operating brick and mortar distribution and retail centers [sic] in all states across Australia.”

It continues, “Of course, Aussie consumers are no strangers to Amazon. In the past few years we have built strong relationship with you and we are here to say thank you!

“In order to express our gratitude towards Aussie consumers, we are coming to you with a $500 Amazon Voucher.

“We have 80 Vouchers to give away this weekend. All you need to do is: Confirm receiving this email by clicking here. Give us your opinion about Amazon.

“That’s simple, right?

“Thank you and Good luck!”

The email was signed off by “Your Prime Team,” referring to Amazon Prime, Amazon’s membership offer which provides fast shipping to members.

While the email stated it had been sent to people who had “subscribed to offer emails”, recipients included people who had never ordered anything from Amazon or signed up for a membership.

Delia Rickard, deputy chairman of the Australian Competition and Consumer Commission, said seven people had reported the “genuine-looking” scam to the watchdog – and none had clicked on the link.

“One of the things that scammers are good at is piggy-backing on a topical event,” she said.

She said it was unclear whether the scam was motivated to spread malware, or to trick people into giving out private information that could be used for identity theft or onsold to other scammers.

The watchdog advises people people to verify whether an offer is legitimate by “checking if it is listed on the retailers’ official website or by calling the retailers’ official customer service line.”

Amazon’s public relations firm Weber Shandwick declined to comment. Amazon’s Australian plans

After Fairfax Media broke the news of Amazon’s Australian expansion plans in 2016, Amazon confirmed its plans in April and promised thousands of new jobs, millions in additional investment, and to “empower small Australian businesses through Amazon Marketplace”.

While Amazon is known for its online marketplace, it has been investing in bricks and mortar stores too.

As at last month, it had six bookstores (soon to be 12), pop-up stores, college pick-up points, and a convenience store without checkouts that is being tested in Seattle. Its finance chief last month described bricks and mortar physical stores as “another way to reach the customer”.

International sales accounted for 32 per cent of Amazon’s sales for the three months to 31 March. International sales were up 16 per cent year-on-year but continued to be unprofitable.

Amazon has been pouring big money into international expansion, particular in India. Its capital expenditure surged 51 per cent year-on-year, primarily due to investment in fulfilment centres, or large warehouses.

Amazon operates its online grocery delivery service Amazon Fresh in 21 cities in the US as well as London and Tokyo, which opened last month.

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West Melbourne roars into record territory

Melbourne developer United Asia Group has put its foot on a West Melbourne development site, setting a new land benchmark for the area.
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UAG, led by Nicole Chow, snapped up the three-storey motel at 45-55 Dudley Street, paying a speculated price around $19.5 million or a per-square-metre rate of around $15,000.

Land rates in West Melbourne have been fetching around $12,000 per square metre, a rate paid by developer Bill McNee for a neighbouring Dudley Street site.

The sale of the Flagstaff City Inn, an owner-run hotel, was executed by Savills Australia agents Clinton Baxter, Benson Zhou and Jesse Radisich.

“It achieved an unprecedented land rate for West Melbourne, which is indicative of offshore developers’ desire to cater for burgeoning demand,” Mr Baxter said.

It is just across the road from Tim Gurner’s Ikebana project where all 241 apartments were pre-sold in four weeks and next door to VicLand’s 38-level tower on the corner at 420 Spencer Street. All its 438 apartments in the tower have sold out.

West Melbourne, on the city fringe, has been steadily developed over the past 15 years but the most recent deal has reached a new level.

Mr Baxter said the West Melbourne market “had sat idling” for some time but it was now moving.

Listed developer Abacus recently purchased an office furniture warehouse and showroom at 512-544 Spencer Street, and has formed a joint venture to develop the block-length site.

Closer to the CBD Chinese developer Holder East recently paid about $25 million for an 1877-square-metre car park at 496-508 La Trobe Street.

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