Yield compression forcing asset diversification and enhancement: CBRE

Yield compression forcing asset diversification and enhancement: CBRE

30 March 2018

Property investors are increasing their focus on alternative sectors that offer income stability and higher returns in a bid to offset lower growth forecasts over the coming years, says Dr Nick Axford, the keynote speaker at CBRE’s annual Australian Market Outlook event in Sydney last week

“It is difficult to find a major economy that isn’t growing at the moment. However, while the forecast is positive for now, we are late in the cycle, which signals rising interest rates over the coming years,” said Dr Axford, who is CBRE’s Head of Global Research.

“While globally, investor sentiment differs from region to region, there is an overwhelming emphasis on asset diversification and stability of income as we move beyond traditional yield-based performance,” he added.

CBRE’s 2018 Asia Pacific Investors Intention Survey revealed a nine-percentage point rise (to 74 per cent) in the number of investors actively pursuing alternative assets from 2017.

It also showed an upward trend in investors that already own alternative assets such as healthcare, student living, and real estate debt.

CBRE’s Asia Pacific Head of Research Henry Chin said with yields unlikely to compress much further in Sydney and Melbourne, investors needed to shift their focus to asset enhancement.

“Landlords can increase revenue by making their building better than its peers, whilst also reducing operating costs by making buildings smarter and leaner,” Dr Chin said.

The survey also showed 33 per cent of office occupiers identify co-working centres as an ideal strategy for increasing their space requirements over the next two years.

By comparison, 42 per cent of investors rate flexible space as the number one occupier trend that will have the most impact on real estate value.

“Flexibility in the workplace is here to stay and one of the best strategies to improve the attraction of a building,” Dr Chin said.

“Our results indicate that half of investors surveyed believe that having up to 20 per cent of a building contain co-working space will enhance a building’s value. Given that we are virtually at the end of the yield compression cycle, and that investors see co-working as a means to add value, we expect the number of co-working options will increase over the next few years,” he added.

“While the impact of co-working on real estate value is still being completely understood, flexibility is without a doubt here to stay,” Dr Axford said.

“In London for example, the number of co-working spaces over the past six years has risen significantly, now accounting for up to 20 per cent of office take-up, while at the same time, the number of 500sqm deals being undertaken in the market has declined,” he said.

The Australian reported this week that Malaysia-backed EcoWorld International will feature a three-level co-working space in its 26-storey Yarra One residential tower in South Yarra.

Last year, global giant WeWork opened its first Melbourne location in Melbourne’s CBD and is eyeing other opportunities across the city.

New Lendlease projects in Docklands are also likely to include a WeWork and rival Regus-owned Spaces. Mirvac has also crafted apartments that allow for working from home.

EcoWorld general manager Jeffrey Ong said the company is targeting creative and tech workers who want to avoid commuting to the city.

The group had planned commercial use for levels one to three of the building, but after talking with local residents discovered the demand for co-working spaces.

“There’s a lot of young population who like this space. They like to be in a co-working space and collaborate,” Mr Ong said.

“Even downsizers or retirees are still active in their work. They still like to go out and work from a workspace rather than just in their own apartment or own study room.”

CBRE Senior Managing Director, Asset Services & Global Workplace Solutions, Pacific, Amanda Steele, said the pace of change in the workplace was rapid.

“It’s not about tenants and occupiers any longer, it’s about experience and how we can deliver an environment that caters to a complete work/life blend,” Ms Steele said.