Signs of economic headwinds failed to impact Melbourne’s office investment market in Q3, with $1.1 billion in assets traded according to new CBRE data.
This was $410 million above the corresponding period in 2018 and boosted sales for the first three quarters of 2019 to $3.4 billion - a slight increase on the previous year.
However, CBRE Senior Director, Capital Markets, Neva Courts noted that while the total value of sales had increased just 41 transactions had occurred, compared to 68 in 2018.
“This illustrates that the market is tightly held but that the quality of stock transacting is increasing,” Ms Courts said.
“Melbourne CBD, fringe and suburban institutional grade office stock is in high demand. We are seeing assets trade at record low yields and expect this to continue with further yield compression likely as investors compete for quality offerings. The sale of Nissan’s new headquarters at Mulgrave on a forward funded basis at yield of 5.9% is recent evidence of this.”
Ms Courts also highlighted the impact of materially cheaper debt.
“Increased leverage and reduced rates are levers allowing investors to price more aggressively and maintain or improve returns, particularly for long leased investments,” Ms Court said.
In the sub $100 million price bracket, CBRE Middle Markets Director Josh Rutman said very few assets had been listed for sale in 2019, which had spurred strong interest in available opportunities.
“This was illustrated by the sale of 22 William Street, where we fielded 14 offers from a range of domestic, interstate and international players keen to grow their office exposure,” Mr Rutman said.
“Interest is being underpinned by investor confidence in the market’s growth prospects and by the returns that can be achieved relative to other investment classes in the current low growth environment.”
Mr Rutman also noted that while stock availability remained extremely tight in the CBD, there had been a major uptick in activity in the metropolitan markets.
“Over $350 million in transactions have been concluded over the past 10 weeks, with some very strong prices recorded as a result of the competitive interest from buyers,” Mr Rutman said.
On the yield front, CBRE’s Head of Office Research Ben Martin-Henry said Sydney and Perth recorded the biggest compression in prime yields in Q3 to average 4.6% and 6.3% respectively, with yields having also continued to compress in Melbourne to 4.8% - the lowest point on record.
“With the RBA delivering three 25bps rate cuts since the federal election, the cost of borrowing is becoming increasingly cheap for investors, who are now benefitting from rates of sub 2.75%,” Mr Martin-Henry said.
“This situation is expected to continue due to an inverted yield curve, meaning that the cost of debt in the long term is expected to be lower than in the short term. This is likely to lead to lead to further compression in property yields as the demand for bonds increases.”
On rental front, CBRE Q3 MarketView report shows that Perth occupied the top spot for net effective rental growth, with the next best performing markets being in more fringe locations – specifically Crows Nest and Macquarie Park in Sydney and St Kilda Road in Melbourne.
Just in Q3, prime net effective rents in Chatswood and Southbank grew by 5.2% and 2.4% respectively, which Mr Martin-Henry attributed to the tight vacancy rates and some tenant leakage the Sydney and Melbourne CBD markets.
“As vacant space, particularly contiguous space, become increasingly scarce and expensive in CBD locations, a growing number of tenants are eyeing more fringe locations, which is reducing vacancy and driving up rents,” Mr Martin-Henry said.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue). The company has more than 90,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 480 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
