Investment returns hit 10-year highs in key metro office markets

Colliers International launches new metro office report

Investment returns in metropolitan office markets are at their greatest levels in more than 10 years, according to a new report from Colliers International.

Colliers International’s H1 2018 Metro Office Research & Forecast Report has found strong effective rental growth of more than 15% in suburban markets such as North Sydney, St Leonards, Chatswood, St Kilda Road and the Melbourne City Fringe over the year to March 2018.

“Coupled with an average of 50 basis points of yield compression over the same time period, capital value growth has been an extraordinary 25% on average across these markets,” Anneke Thompson, Colliers International National Director of Research, said.

“The long term growth of these key markets will be impacted by a number of factors, including tight occupancy, withdrawal of stock, residential development upside and major metro rail upgrades in Sydney and Melbourne."

John Marasco, Colliers International Managing Director of Capital Markets & Investment Services, said while the yield compression cycle is moderating in some markets, land rich opportunities in metro markets are currently highly sought after, as buyers want the ability to expand their investments – something more difficult to achieve in a CBD market.

“Withdrawal of stock continues to have an impact on metro markets,” Mr Marasco said. “The Sydney metro market has reduced by 40,000sqm over the past year, and Brisbane’s has contracted by 34,000sqm. In Melbourne, while the metro market grew by 30,500sqm, the key markets of St Kilda Road and the City Fringe have both contracted – St Kilda Road by close to 40,000sqm.

“In addition to the supply and demand fundamendals contributing to rental and capital value growth, investors also see a unique exit strategy for metro office investments.

“A number of metro markets are also proving popular with residential developers, and many investors are attracted to the potential residential conversion exit strategy that these investments provide."

Mr Marasco said respective metro rail developments in both Sydney and Melbourne offered significant demand uplift potential upon completion, with markets such as the Sydney North Shore and St Kilda Road in Melbourne to be particularly impacted.

”The affordability factor is also playing a part. As rents in the premium end of the Sydney CBD market breach the $1000 per sqm mark, savvy occupiers are now looking to alternative markets such as North Sydney, which offers much more affordable rents and significant improvements to accessibility once the Sydney Metro Rail development is complete.

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