Commercial & Industrial Property News Update

Australia - Melbourne Trumps Sydney In Large CBD Office Investment Sales

August 30, 2012

Colliers International found that Melbourne outperformed Sydney for investment sales of CBD office properties worth AUD 20 million or more in H1 2012.

Large CBD office properties proved to be more popular in Melbourne than Sydney for the first-half of the year, according to latest research by Colliers International on investment sales figures for office assets worth AUD 20 million or more.

Colliers said that Melbourne recorded AUD 629.5 million in investment sales, higher than Sydney, which managed AUD 478.6 million in sales over the first six months of 2012.

The biggest whole-asset sale in Melbourne over the survey period was 150 Collins Street, which was purchased by GPT Wholesale Office Fund for AUD 181 million on a yield of 6.77%.

Sydney's most expensive single-asset sale was Macquarie Bank's AUD 131 million vacant possession purchase of 48 Martin Place on yield of around 7% and 7.5% (as estimated by Knight Frank).

In addition, the only premium-grade asset sale in Sydney in H1 2012 was the 25% acquisition of 126 Phillip Street for AUD 176 million by Investa Commercial Fund from Investa on a yield of 6.35%.

Of the two office markets, Sydney has the brighter short-term outlook, while Melbourne's vacancy rate is expected to continue to rise.

Colliers says that despite a large number of buyers chasing better-quality assets across Melbourne's CBD office market, "the short-term outlook for transaction volumes remains subdued".

"This is a function of the lack of investment-grade stock on the market for sale, as opposed to low levels of demand.

"As a result we expect face rents to remain stable while incentives will experience further increase, as landlords look to offer more to attract and secure tenants. This will in turn lead to further declines in effective rents across all grades over the next 12 months."

On Sydney's CBD market, Colliers remarked that leasing and tenant enquiry activity is expected to remain "buoyant from smaller non-CBD based tenants who are looking to take advantage of softer market conditions to evaluate and upgrade their tenancies".

"Limited supply entering the market and positive absorption over the remainder of 2012 is expected to see vacancy rates decline across the Sydney CBD office market."

"This is expected to result in subdued rental growth and a stabilisation of incentives over the period."

According to John Marasco, Colliers International managing director of investment services, Sydney prime grade yields have stabilised, while the yield spread between high- and low-quality secondary-grade assets has continued to widen.

"Quality office buildings, particularly premium and A-grade, that offer a weighted average lease expire (WALE) of four years or greater continue to be in high demand from investors."

"A lack of this type of property on the market for sale has seen sales volumes remain low, and this has led to the stabilisation of prime grade yields during the first half of this year," he said.

"The outlook for the next six months is overwhelmingly positive, as the number of genuine enquires for investment properties in Sydney's CBD has increased since the end of the 2011-12 financial year," he added. "We predict this will translate into a greater number of assets sold in the second half of 2012, with Sydney ending the year on a definite high."

For Melbourne, Colliers noted that CBD office properties continue to be highly sought after despite a rising vacancy rate and declining rents. Demand is especially strong for premium and Grade A stock, it added.

Marasco said that good quality Melbourne CBD assets continue to attract keen interest from a range of different buyer types.

"A high proportion of demand is coming from offshore, but there should also be no underestimating the level of active domestic capital."

Tags: Investment properties, Business space, Office for lease

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