Record investment, demand in Australian office markets set to continue

Colliers International launches Australian Office Investment Review

Record sales volumes and historically low yields have driven another year of outstanding demand and investment in Australian office markets.

According to Colliers International’s Capital Markets Office Investment Review, the past financial year has seen Australian office markets continue to build on their growing global reputation with high transacting assets achieving historically low yields.

“Positive fundamentals such as white-collar employment growth, strong rent reversion, declining national vacancy and an unprecedented infrastructure spend have all contributed to Australia’s global office strength,” John Marasco, Colliers International Managing Director of Capital Markets, said.

A record $18.96billion in investment sales (above $20 million) occurred nationally in the 2018 financial year – representing a 46% increased on the 2017 financial year.

“This attests to the continued strong interest in Australia’s office market from a global standpoint, as capital values per square metre have significantly increased while the nation continues to enjoy sustainably low interest rates,” Kristina Mastrullo, Colliers International Associate Director of Research, said.

The eastern seaboard recorded the highest volume of investment activity with sales representing around 92% of the nation’s total. NSW dominated at 57% of the total national share. Domestic purchasers outbid foreign buyers, accounting for 58% of total transaction volumes.

Mr Marasco said the ongoing strength of Australia’s office market, underpinned by a forecast of strong demand, was likely to encourage domestic and offshore interest, stimulating more sales throughout the remainder of the year and next.

“The most highly sought-after assets from both local and global institutions and pensions funds will continue to be new-generation office buildings, most of which will be developed within Sydney and Melbourne,” he said.

The report found that Sydney CBD would contribute 17 new developments from the second half of calendar year 2018 onwards, and 13 for the Melbourne CBD, as developers inject an estimated 1.2 million square metres of stock over the next six years.

“As a result, it’s likely that fund-through transactions will be a continuing trend as we’ve recently seen in Sydney with AMP’s Quay Quarter Tower and Brookfield’s, Wynyard Place,” Mr Marasco said. “ As the Australian office market continues to edge towards the bottom of the yield cycle, further compression through to 2019 is probable as investors continue to be buoyed by the positive rental growth outlook for eastern seaboard cities, particularly Sydney and Melbourne.

“An increase in the risk-free rate suggests a re-adjustment in return expectations, however based on strong leasing and market fundamentals and our rise in the global ranks, Australia is likely to remain resilient throughout the cycle."

Ms Mastrullo said Sydney, Melbourne and Brisbane were expected to develop approximately 1.2 million square metres of new office stock by 2024. Based on white collar employment growth projections, Colliers International estimates approximately 1.9 million square metres of additional office space will be demanded by FYE 2026-27, with service-based industry groups accounting for the lion’s share.

“Accounting for current known precommitments, this reduces available development space to 570,000 sqm,” she said.  “However, established metro and fringe office markets are experiencing significant gentrification and are prepared to take on a larger share of corporate occupiers.

“Alternative NSW office markets such as Sydney’s City Fringe, North Sydney and Parramatta, and Melbourne’s City Fringe suburbs such as Cremorne and Richmond, are expected to house more service-based white-collar workers and have increased in popularity due to the technology and co-working sectors and their penchant for unconventional locations.

“Furthermore, as a solution to our sprawling cities, transportation and accessibility has certainly been front of mind. Infrastructure investment has historically been un-matched, with Sydney, Melbourne and Brisbane now receiving a significant level of state and federal spend with motivations to better accommodate new and growing businesses."

Mr Marasco said the basis of Australia’s office market growth – unprecedented infrastructure investment and growing service-based industries – was sustainable.

“This is in large part due to current and evolving technological impacts, allowing us to close the gap between Australia and the world’s global cities.  This has resulted in increasing levels of capital investment since 2014,” he said.

“On a global scale, Australia remains competitive amongst offshore office markets when looking at average CBD prime yields. Our affordability is further pronounced when looking at our Asia Pacific neighbours such as Beijing, Singapore and Hong Kong, all currently sporting average yields under 4.10% and under.”

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