Melbourne leads global CBD yield compression

Melbourne leads global CBD yield compression

10 May 2019

Melbourne has locked in its status as a prime international investment destination with its central business district recording the greatest yield compression over the past three years across CBD office markets globally, The Australian reports.

The report cites real estate group Savills latest Impacts report, which measures the level of yield compression across key CBD markets around the world.

According to the report, Melbourne led the charge, with prime yields falling 174 basis point since 2015, followed by Beijing (down 132 basis points) and Berlin (dropping by 120 basis points).

Savills chief executive Paul Craig said while Australian cities were still off the 3 per cent mark hit by other overseas CBD markets “it would be prudent to assume yields here will fall in a similar trend in the next five years”.

Prime CBD office market yields now sit below 3 per cent in Hong Kong, Frankfurt, Tokyo and Berlin, in a reflection of the new benchmarks being set globally. Savills forecasts that the Paris (3 per cent) and Amsterdam (3.5 per cent) prime CBD office markets could see market yields harden to under 3 per cent by the end of 2019.

“Throughout the past three years, we have seen growing investor demand from foreign and domestic investors drive yields down to record low levels,” said James Girvan, Savills director capital transactions in Victoria.

“Investors are drawn to the Victorian capital, not only because of strong demand drivers and nation-leading economic indicators.”

“We are seeing more and more investors, both domestically and internationally, recognise the investment potential in Australia, which will likely drive yields further down, particularly with interest rates likely to remain low in the short to medium term,” Savills Australia’s director for Research & Consultancy, Shrabastee Mallik, said.

“Based on global data, yields in Australia remain elevated, compared to comparable investment destinations, providing the impetus for foreign investors to invest in Australian office markets,” she added.

This trend is seen in major deals, including Dexus and its wholesale fund buying the landmark 80 Collins Street development from QIC Global Real Estate for about $1.48 billion.

Charter Hall’s PFA Fund has also tied up a deal to buy a Melbourne office complex from Malaysian public services pension fund Kumpulan Wang Persaraan ­Diperbadankan for close to $200m.

A local player, believed to be backed by mainland Chinese capital, has also swooped on 420 St Kilda Road, for a price thought to be over $95m after manager Vantage boosted its performance.

All the deals have been struck at tight yields either at or just below the 5 per cent mark.

Savills said the long-time link between office yields and borrowing had “broken down” as buyers profiles had changed with fewer relying on bank borrowing.

Savills said a rise in interest rates was also unlikely to result in a corresponding rise in prime office yield. This means that as long as investment demand remains stable yields will also be locked in.