Melbourne, 27 January 2016 – The suburban office market is positioned to become Melbourne’s next property hotspot, with contracting yields in the CBD prompting investors to look further afield for higher returns.
A new CBRE Viewpoint highlights a flight to income underway across Melbourne, with domestic and foreign investors seeking out metropolitan office assets, which offer higher yielding opportunities.
Demand for suburban office assets across Melbourne has steadily increased over the past 12 months, with investors snagging approximately $1.7 billion worth of sales – up from about $620 million during the corresponding period.
Comprising about 40% of the city’s total office stock, the suburban office market has experienced a surge in investor demand, with $780 million in sales transacting in the outer east and $450 million in the city fringe precinct.
CBRE Associate Director, Metropolitan Investments, Jamus Campbell said rising capital values in the Melbourne CBD, coupled with contracting yields and a shortage of stock, had priced some investors out of the market.
“Capital values in Melbourne’s suburban precincts have remained substantially below CBD levels, making them significantly more accessible, and, subsequently attractive,” Mr Campbell said.
While the bulk of demand for suburban office assets has primarily been driven by domestic buyers, foreign investors continue to flex their strength, accounting for approximately 25% of sales over the past 12 months.
By comparison, foreign buyers accounted for close to 50% of transaction activity in the Melbourne CBD.
The report shows heightened demand for suburban offices has underpinned an 11% rise in capital values over the past year, averaging $3975 per square metre for prime suburban assets and $3,255 per square metre for secondary.
Yields have sharpened by around 65 basis points year on year to 7.7% for prime grade office assets, and 8.1% for secondary.
Mr Campbell said residential conversion activity had also supported demand for suburban office assets across Melbourne.
“With Melbourne’s residential market running red hot, there has been more demand from developers looking to acquire suburban office assets for higher and better use,” Mr Campbell explained.
“This can be seen through the city fringe and inner-eastern markets where the underlying zoning of the property allows for future residential upside and therefore lends itself to a shrinking market for office space, which should put upward pressure on rents.”
CBRE Research Analyst Anne Flaherty said a number of speculative developments earmarked for Melbourne’s suburban market were evidence of the market’s strength.
“The 16,000sqm recently completed at 35 and 37 Dalmore Drive, Scoresby and 15,800sqm at 1367 Dandenong Road, Chadstone – both in Melbourne’s outer east – are testament to the high level of confidence in the suburban market,” Ms Flaherty said.
Approximately 7,400sqm of office accommodation is also currently under construction at 545 Blackburn Road, Mt Waverley.
CBRE Senior Associate Director, Office Services, Elise Betts said the leasing success at Caribbean Park on Dalmore Drive was testament to the strength of tenant demand in the suburban market.
“Caribbean Park highlights the premium office market emerging in Melbourne’s suburban areas, and how tenants are increasingly shifting their attention to these opportunities,” Ms Betts said.
“The Caribbean Park precinct offers high quality finishes, floor plate efficiencies and terrific amenity for staff including green space to work within, a fresh food market and premium end of trip facilities.”
Melbourne’s suburban office market also benefits from a low vacancy rate compared to other office precincts across the country.
With the exception of Sydney (at 6%), central business districts in other Australian states recorded double digit vacancy – Brisbane 15%, Adelaide 12% and Perth 17%. In July 2015, Melbourne suburban vacancy was 7% - lower than the 8% recorded in the CBD.
“Melbourne’s suburban market has a broad tenant mix, with tenants spread across a wide range of industries. This tenant diversity provides some resilience in the event of ‘shocks’ to specific industries,” Ms Flaherty added.
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