Investors pump $6b into Australian office market

Investors pump $6b into Australian office market

26 April 2019

Investors have pumped more than $6 billion into Australia’s office markets in the first three months of this year, an amount nearly equalling the $6.3 billion recorded in the first quarter of 2018, which was the strongest ever on record, says The Sydney Morning Herald.

The latest Cushman and Wakefield office investment report says overall investment volume was significantly lower than the $16.6 billion recorded in the last quarter of calendar 2018, however this was anticipated as the first quarter is historically smaller, due to the Christmas/New Year vacation period.

“Investors returned to the market in very early January, with a voracious appetite for Australian assets, particularly in the office sector,” the Cushman and Wakefield report says.

“Office activity was dominated by the Sydney CBD, however activity in Perth and Brisbane is rising. The $800 million stake in the MLC centre which was sold by co-owner GPT Group to the other owner, Dexus, led the first quarter sales.”

Despite concern about tightening regulations, the foreign weight of capital stayed high in first quarter 2019, making up 46 per cent of total investment.

“Over the past five years, foreign investors have been most attracted to office assets, accounting for 48 per cent of the sector’s investment, including 39 per cent in the first quarter 2019.

“Multiple factors have contributed to the relative strength of foreign investment. Firstly, Australian office returns are relatively attractive in the global context. Secondly, the potential for positive leasing spreads, rent growth, has been strong, particularly in Sydney and Melbourne.”

Sydney CBD, for example, recorded 71,800 square metres of net absorption over the 12 months to March 2019 and vacancy tightened to 3.7 per cent.

“We were saying late last year that the Sydney CBD vacancy rate has hit the lowest level since the 2000 Olympics,” JLL head of leasing Tim O’Connor said.

“The reduction in vacancy recorded over the first quarter of 2019 now has the Sydney CBD vacancy rate at the lowest level since 1989.”

One of the large deals in the pipeline include Charter Hall looking at half-stake in the leasehold of the $1.8 billion Chifley Tower and Plaza, being sold by Singapore’s sovereign wealth fund GIC.

Potential buyers are also reported to be vying for the $400 million Zenith Centre in Chatswood on Sydney’s north shore.

An office property at 230 Clarence Street is reportedly being offered for sale for more than $40 million.

Sydney’s fringe office market is also heating up due to high rents and shrinking supply, say agents.

The demand for office space in the mid-market—between 1000 square metres and 2999 square metres—has surged by one-third in the past year as activity heats up in the metro areas outside the CBD markets, says the AFR.

Overall, total demand for office space of all sizes rose 3 per cent in the first quarter this year compared to a year earlier to a total of 644,619 square metres, according to figures compiled by Colliers International.

That overall result puts in context the acceleration in the mid-market, where the number of inquiries also increased by 41 per cent.

Simon Hunt, Colliers International managing director of office leasing, said this was an emerging trend in office enquiry across major markets in the first quarter of 2019.

“It seems the sweet spot is the mid-size market, with a notable increase in businesses actively searching for office space in the 1,000-2,999 square metres range,” Mr Hunt said.

“In 2018, we saw demand primarily for office space over 3,000 square metres and the year before the demand centred around small businesses under 1,000 square metres.”