The Melbourne office market is set to remain strong in 2012 as a combination of low supply and strong demand forces investors to look beyond the CBD, according to a new report from real-estate services provider CBRE Australia.
CBRE senior research analyst Erin Obliubek said Melbourne’s strong fundamentals as a market would be a key driver of buyer activity this year as investors focus on the prospects for positive and sustainable growth in capital values.
“Offshore investors are anticipated to remain an active purchaser group followed closely by domestic institutions, with private investors/syndicators focusing largely on the lower price brackets,” Obliubek says.
On a global level, Obliubek says Australian office assets are attractively priced according to conventional pricing models. This, she says, coupled with the resilience of the Australian economy, high liquidity, attractive investment yields and market transparency, is driving investor interest in key CBD markets such as Melbourne.
In its report, CBRE predicts that a total of around $800 million worth of office assets throughout the CBD will change hands this year. That may be down from the $1.1 billion recorded last year and the $1.6 billon in 2010, but comparisons with those years are misleading because the past two years have been exceptionally strong and also because CBRE’s expected dollar value of sales this year is being artificially held down by a lack of stock.
A trip down St. Kilda Road
That lack of stock, CBRE says, is forcing investors to look at markets beyond the CBD and Docklands area.
One particular area of interest is St. Kilda Road, where transactions over the six months to March alone included 601 St. Kilda Road (bought by Shakespeare Investments for $30 million), 484 St. Kilda Road (bought by Abacus and Heitman LLC for $68 million), 441 St. Kilda Road (purchased by Centuria Property for $58 million) and 607 St. Kilda Road (bought by private Chinese investor Casino Investments for $28 million).
“With a shortage of assets available in the CBD, there has been a progressive shift towards properties previously overlooked by investors and this has resulted in a number of transactions outside the CBD/Docklands precinct,” CBRE senior director of institutional investment properties Mark Coster says.
“We expect interest in the St. Kilda Road precinct to continue to strengthen, given its relative affordability compared to other markets and increasing momentum on the leasing side. These fundamentals are creating real upside for investors,” he said. “In the suburban market overall, the interest in coming predominately from private investors and syndicators seeking assets backed by government tenants with long WALEs. Assets valued above $50 million have also attracted consideration from a number of offshore investors.”
The report also indicates that, having dropped back from pre-GFC highs in 2009, investment yields in both the CBD and suburban markets have stopped falling and are now firming up.
Despite being down from heights of almost 7.5 per cent during their peak, CBRE says implied yields in the CBD have stabilised at just under seven per cent now, and are expected to remain stable throughout the rest of the year.
CBRE says yields in St. Kilda Road and Southbank began to firm up in the first quarter this year and now stand at 8.5 per cent and 7.63 per cent, respectively. It says continued improvement in St. Kilda Road yields is expected through 2012.