Investor appetite drives office investment yields to record lows

Net absorption of office space rebounds to circa 260,000sqm

​Sydney, 20 January 2015 – Office investment yields have hit a record low in Melbourne and are on a similar trajectory in Sydney after another standout year for commercial sales activity.

CBRE’s new Australia Office MarketView report highlights that 2015 was a bumper year for office investment sales, with $14.9 billion in assets changing hands relative to the 10 year annual average of just over $9 billion.

This contributed to a further tightening in prime yields in Q4 to average 6.1% nationally – with Melbourne achieving record yields.

CBRE Associate Director, Research, Felice Spark said the $675 million sale of a 50% stake in Southern Cross Towers had assisted in resetting market yields in Melbourne, with the sale struck at a yield of circa 5.1%.

CBRE’s report tips further yield compression given ongoing investor demand, particularly from offshore buyer groups – not just from Asia but from Germany, North America, the Middle East and the Euro Zone.

“There are still several major transactions in due diligence or in negotiation which are expected to settle in Q1 this year. We are forecasting further yield compression in the first quarter of 2016, but then expect to see stabilisation, before some modest decompression later in the year, as a result of rising bond yields,” Ms Spark said.

In Melbourne, prime yields tightened by 32 basis points over Q4, 2015 to an indicative yield of 5.9% - the lowest on record, compared to a previous low of 6.3% in the December quarter of 2007. Secondary yields in Melbourne also tightened, by 25 basis points, to a record low of 7.0%

During the same period, prime yields in Sydney tightened by a further six basis points to an indicative yield of 5.4% - just 20 basis points away from the record low of 5.2% achieved in the December 2007 quarter at the peak of the cycle, pre GFC.

Yields also compressed in Brisbane and Canberra, while remaining stable in Perth and Adelaide.

CBRE Executive Managing Director, Capital Markets, Mark Granter said interest from offshore investors was continuing to propel the Sydney and Melbourne investment markets. This been further assisted by the improved leasing outlook for both cities,” Mr Granter said.

“With capital continuing to diversify and move to safer havens, the expectation is that Sydney and Melbourne will continue to attract investor interest. This is being underpinned by the continued risk spread between the 10 year bond rate and total returns in these markets, where yields remain comparatively attractive from a global perspective despite the compression that has recently occurred.”

“The foreign capital, particularly from Korea will also look at other markets such as Brisbane and Canberra, where there is longer term leased properties available.”

On the office leasing front, CBRE’s report highlights that net absorption rebounded in 2015 to an estimated 263,754sqm after a flat year in 2014.

Absorption was driven by Sydney and Melbourne (with circa 130,000sqm of absorption in each CBD), with Perth and Brisbane both recording a third consecutive year of negative absorption.

CBRE’s data highlights that the national CBD vacancy rate increased to 11.4% as at December 2015, up from 10.7% in June 2015 and attributable to a significant injection of new office supply over the second half of 2015.

“2016 will see a continuation of high supply additions, resulting in the national vacancy rate peaking, on our forecasts, at 11.5% at the end of the year,” Ms Spark said.