Melbourne office sales off to a flyer

Melbourne office sales off to a flyer

16 August 2019

Victoria has recorded its highest ever start to the year for office property sales, with $2.6 billion in assets changing hands according to new CBRE data.

CBRE’s Q2 Office MarketView report highlights that Victoria and NSW were the two most active markets in the country in the first half of 2019, as investors continued to seek out office investment opportunities.

A total of $8.5 billion in office property valued at over $5 million changed hands nationally during the six-month period – up 21% on the previous corresponding period.

“Volumes were better than expected, registering the strongest start to a year on record as despite the tightly held nature of the major CBD markets, and the difficulty in recycling capital, owners have been willing to sell for the right price,” CBRE’s head of Capital Markets research, Ben Martin-Henry, said.

“This has resulted in further yield compression across all major markets to a national average of 5.2% for prime stock.”

Mr Martin-Henry noted that the RBA’s announcement of two, 25bps rate cuts since the Federal election meant that investors were now capitalising on rates of sub 3%, which was expected to drive further compression in property yields.

From a Victorian perspective, the $2.6 billion sales tally in the first half represented a slight increase on H1, 2018.

Major acquisitions in H1 included 737 Bourke Street, which was purchased by Charter Hall from Malaysian public services pension fund KWAP for $192m on a ~5% yield. Other significant deals included AEW’s $200 million purchase of 31 Queens Street from Challenger on a ~4.9% yield.

However, CBRE Senior Director, Capital Markets – Office, Neva Courts noted; “While the value of Melbourne CBD office transactions in H1 2019 was high, there is still a significant volume of domestic and offshore capital with an increasing urgency to be deployed.  Genuine buyers need to be aggressively pricing rent growth to unlock acquisition opportunities.”

Activity was slower in the sub $100m CBD market volumes due to limited availability, with only two offerings in the $50-$100m price bracket, versus six during H1, 2018.

CBRE Middle Markets Director Josh Rutman said; “The shortage of opportunities is leading to aggressive competition from private investors and smaller unlisted funds when sub $100 million assets are listed for sale, which is resulting in a significant capital value uplift for owners.”

Outside the CBD, sales activity dropped during the first half, ahead of a flurry of activity post the Federal election, Mr Rutman said.

He noted that private and high net worth investors remained active, with a large proportion of buyers originating from Malaysia, Singapore, Hong Kong, Macau and mainland China.

“The metropolitan office market risk premium vs the Melbourne CBD has narrowed as investors become increasingly comfortable with non-CBD investments, given the strength of tenant demand, effective rental growth and strong absorption figures in key suburban markets such as St Kilda Road, Richmond, Hawthorn and South Melbourne,” Mr Rutman said.