Investment yields on Sydney towers to hit 4.5pc: JLL
Investment yields on prime Sydney office towers could be squeezed to as sharp as 4.5 per cent this year, and the rate in Melbourne could also slip below 5 per cent, according to JLL.
That forecast comes after commercial property sales hit $14.46 billion in 2016, the third-highest year on record for sales volumes, on JLL figures.
It was a shortage of supply rather than lack of demand that held back the total, with plenty of appetite for prime towers still in the market.
The demand will further squeeze yields – or capitalisation rates – as major global funds compete for blue-chip commercial real estate in this market.
The search for yield is also pushing major investors into the suburban markets of Sydney and Melbourne.
“This year you’re going to see some of our best buildings being offered,” JLL’s Rob Sewell told The Australian Financial Review, referring to the Sydney market.
“The appetite is equally great for Melbourne. You’ll see Melbourne well and truly break the 5 per cent cap rate.”
Among the major offerings in the Sydney market is a half-stake in the MLC Centre, which fetch as much as $700 million. Also in the market, Brookfield Property Partners is looking for an investor in its $1.8 billion Wynyard Station redevelopment.
In Melbourne, Mirvac is looking for investors in two Collins Street developments, worth a more than $1 billion combined, while M&G Real Estate is exiting a $180 million tower in Bourke Street.
Underscoring the investment case, prime net effective rents are projected to rise 34.9 per cent in the Sydney CBD and 18.7 per cent in the Melbourne CBD from 2017 to 2019.
The JLL report on investment in 2016 also notes how the Brisbane and Perth markets, which fell out of favour due to the declining resource investment boom, are once again coming into consideration for some buyers.
“The number of buy mandates for Brisbane and Perth is increasing,” Mr Sewell said.
“Investors are confident that vacancy has reached the cyclical peak and will trend lower over the next five years.”
Overseas investors accounted for 42 per cent, or $6.19 billion, of total office transactions in 2016. The buying was dominated by Chinese, Singaporean and US investors.
“Our review of the spread between target and current allocations by offshore investors shows potential sources of capital in 2017 include South Korea, Hong Kong, Singapore and Germany,” said JLL’s Simon Storry.
