Victoria 2020 property market outlook: Savills

Victoria 2020 property market outlook: Savills

10 January 2020

Savills’ recently provided a 2020 property market outlook for each state in Australia. Here’s a summary of predictions for Victoria.

Capital Transactions

According to James Girvan, Director of Capital Transactions at Savills Australia, the Melbourne CBD saw unprecedented low levels of major transactions in 2019.

“The low yielding environment, domestically and globally, combined with anticipated CBD office rental growth, positions Melbourne as the most tightly held office market in Australia,” he said. “2019 office transactions in Melbourne, whilst few, have set new benchmarks such as the sale of 80 Collins St. At $1.76b, this was the largest direct property transaction at the time (May 2019).”  

“In 2020, the ‘low for longer’ interest rate environment is expected to keep yields tight, with the potential for record low yields. Rental growth will continue in the low vacancy environment and local and offshore investors’ appetite will remain extremely strong. However, investors will be cautiously optimistic on effective rental growth due to premium grade stock delivery which will push vacancy up to more ‘normalised’ levels in 2021/22.”

CBD & Metropolitan Sales

According to Clinton Baxter, State Director of CBD & Metropolitan Sales at Savills Australia, the Melbourne commercial market in 2019 can be characterised by two distinct periods– ‘before the May federal election’ and ‘after the federal election.’ Before the election, sentiment and confidence was weak across the board, with both buyers and sellers reluctant to make a decision or commit.

After the election result was known, confidence soared and the market kicked back into gear, and was further propelled by the subsequent RBA interest rate cuts to record low levels.  

“All sectors of the commercial investment market have experienced a very strong year with yield compression a direct result of the low interest rate climate,” said Mr Baxter. “Investors have increasingly been willing to consider specialised sectors such as petrol stations, child care centres and medical investments in their pursuit of yield.”

“The big winners will be in the CBD market – land, retail, and office assets.  All will experience considerable growth in 2020 and beyond.  A shortage of development land ensures that those CBD markets are completely insulated from over-supply whilst the local residential, worker and tourist populations continue to grow at unprecedented rates.”

Retail Investments

According to Rick Silberman, Director of Retail Investments at Savills Australia, the retail investment market in Victoria has been dominated this year by private investors chasing non-discretionary investment grade stock. 

“We have seen yields compress significantly for fuel, fast food and standalone supermarket investments as astute investors lock in cheap 5-year debt,” he said.

“The sub-regional shopping centre market has undergone a period of repricing throughout 2019 with several assets failing to sell after public marketing campaigns.  We have seen longer and more intense due diligence periods as investors undertake their investigations.  The significant land holdings have seen many buyers look into the development options that may be available to complement the existing retail centre.”

Industrial & Logistics

The North Western area of Melbourne’s Industrial sector has maintained its position of Australia’s premium location for warehousing and distribution. Market confidence is solid from both the ownership and occupier standpoints. Underpinning this confidence is a strong level of speculative construction and those doing so are predominantly being rewarded with those properties either sold or leased prior to the end of construction. 

“Prime rental rates have been increasing and now stand in the $80- $90 per sq m range,” said Greg Jensz, Director of Industrial & Logistics at Savills Australia.

“Land supply in the sector is at an all-time low. In my 27 years in the Industrial market I have never seen it so hard to find a block of land to purchase, regardless of size. There is minimal supply set to come into the market in the short to medium term. Pricing has continued its strong growth as a result, with rates as high as $450 per sq m being achieved, and we see increases occurring from there.”

Supply Chain

According to Bob Quirk, Director of Supply Chain at Savills Australia, increased supply chain design and operations sophistication continued in 2019. The key drivers were global competition, consolidation, ecommerce, increased customer expectations, and land and space constraints.

“Australian supply chains now compete with global chains in terms of customer service and cost-to-serve: multinationals benchmark performance across continents; and online customers choose on a daily basis to buy from Australia or overseas,” he said.

“With consolidation, multiple sites within a geography are being consolidated into larger purpose built sites.  These are delivering cost reductions with overheads and shared spaces, flexibility of multi-skilled labour and other procurement opportunities associated with economies of scale.”

Office Leasing

The2019 Melbourne office market has produced a stellar performance for landlords with increasing rents, falling vacancies and steady demand. Rents have risen in the order of 10% + across all grades, and whilst there has been downward pressure, lease incentives have remained stubbornly high given the strong market conditions.

The lack of choice in the market and increasing costs have resulted in many tenants choosing stay put in their current premises and look to increase efficiencies.

“The steady demand has come from a wide range of sectors with Business services, IT, Education and Co Working being the leading lights,” said Mark Rasmussen, State Director of Office Leasing at Savills Australia. “Unlike Sydney, the small suite market remains strong. The wide-ranging demand provides Melbourne with a future solid base.”

“Melbourne’s new Silicon Valley, the Richmond/Cremorne markets, have consolidated further with Bunnings, Uber and Afterpay likely to join Reece, Seek, REA, Domain and MYOB to establish the area as a preferred alternative to the CBD, offering creative spaces helping the IT sector to attract and maintain staff. Effective rents achieved for these tenants has been comparable to CBD transactions.”

Overall Victoria Market Prediction

“If there’s a theme for the overarching Victoria property market, it’s that the lower interest rate environment will continue to maintain demand for quality assets as it has in 2019,” said Stuart Fox, National Head of Valuation & Advisory & Managing Director at Savills Australia.

“People are seeking yield, and I think in 2020 there’s going to be a rise in demand for alternative investment classes in addition to what have been our traditional property investment classes of office, industrial, and retail. For example, the healthcare sector and the built-for-rent sector. People’s search for yield is going to mean they’re going to be exploring those opportunities more and more as a compliment to their existing traditional portfolio.”