Foreign investors helped Melbourne's office market to new heights in 2017
Office sales in Melbourne’s CBD in 2017 increased more than 200 per cent from the previous year and more than doubled the 10-year average of $1.8 billion, according to latest research from Savills Australia.
The record high office sales, totalling $3.88 billion, consisted of 20 deals, of which 14 were purchased by foreign investors for a total of $2.62 billion, the Quarter Time national office report found.
The results underpin a historically high year for greater Melbourne, which included the CBD, fringe and suburb areas. The $4.77 billion of office sales marked the strongest 12 months since 2014.
Savills Australia research associate director Monica Mondkar said the CBD sales’ volumes were supported by strong investor demand that capitalised on low interest rates and a low yield climate.
“Foreign investment levels were at their highest on record last year,” she said.
“This buyer class dominated the market, making 55 per cent of purchases by value, followed by trusts with 15 per cent and funds with 6 per cent.”
Artist’s impression of the Collins Arch development at 447 Collins Street. Image: SHOP Architect PC/Woods Bagot
Developers led vendor activity in Melbourne’s CBD, offloading five prime office projects – including 839 Collins Street, 477 Collins Street, 447 Collins Street, 311 Spencer Street and 405 Bourke Street.
Topping the list of top-15 sales was 839 Collins Street, Docklands, comprising of 39,000 square metres of space, which sold for $425 million in January 2017.
Placing second on the list was 58,000 square metres of space (or 50 per cent) at 477 Collins Street, Melbourne for $414.17 million in June, followed by 61,500 square metres (or 50 per cent) of 405 Bourke Street, Melbourne, for $400 million in December and 311 Spencer Street, Melbourne (65,648 square metres) for $347.8 million in June.
“Five fund-through deals totalling $1.88 billion were transacted at sub-5 per cent market yields, which were also sitting at historical lows and coincide with the Reserve Bank of Australia’s record low cash rate of 1.5 per cent,” Ms Mondkar said.
“These projects are slated for completion between 2019 and 2021.”
Data for the fourth quarter in 2017, for Melbourne’s CBD, showed gross face rents were $685 a square metre (low) and $805 a square metre (high), with a typical lease term of five and eight years respectively in the A-grade market.
B-grade market gross face rents were $595 a square metre (low) and $620 (high).
In the premium market, rents ranged from $725 to $1020 a square metre, with typical lease terms ranging from six to 10 years.
Ms Mondkar said Melbourne CBD’s vacancy rate had been contracting since December 2014.
She said it would remain in that state until new supply hit the market in 2019.
“This has led many developers to kick-start new office developments,” she said.
Savills Australia capital transactions state director Ben Parkinson said Victoria’s economic and population growth, as well as its growing full-time employment numbers were the highest in the nation and were causing office demand to increase rapidly.
“The record spend in the CBD is in part a reflection of Melbourne’s liveability status and projections that it is on track to become Australia’s most populous city,” he said.
“Other factors include the extremely close ties of Melbourne’s nation-leading education sector to off-shore investment, and the relative simplicity of Melbourne’s landscape, which has made it much easier for foreign investors to understand and transact.”
When compared with the Sydney CBD office market, Melbourne’s current yields were another drawcard and Mr Parkinson said he expected foreign-investor appetite to remain buoyant.
Ms Mondkar said the US Federal Reserve System’s December 2017 meeting, which resulted in benchmark interest rates increasing by 25 basis points, with three hikes forecast for the duration of 2018 was in contrast to the RBA’s indication, which suggested cash rates might continue to remain lower for longer, impeded by low wage growth, high household debt levels and a drag on inflation.
“For investors, this means that Australian commercial property is expected to remain attractive in 2018, as it will continue to offer cushioning against long-term bond yields,” she said.
Mr Parkinson predicted investors would continue to choose healthy returns through property investment over risk-free bond yields.
“The fundamental difference in buyer activity will be to weigh up future income growth against the yield chase in the coming years,” he said.
“As interest rates rise in the US and lift yields, Australia – and in particular, Melbourne – will remain a lucrative investment destination for foreign buyers when compared to its global competitors in the capital transactions market.”
