INVESTORS LOOK BEYOND CBDS FOR PRIME COMMERCIAL REAL ESTATE

Written on the 13 September 2016

INVESTORS LOOK BEYOND CBDS FOR PRIME COMMERCIAL REAL ESTATE

COMPETITION for high-quality metropolitan office investments in Sydney, Melbourne and Brisbane is rising among large offshore investors, says new Colliers International research, leading to the gap between CBD and metro investor volumes tightening as the search for prime assets widens beyond the traditional business areas.

This can be seen in the metropolitan sales volumes in Sydney, which reached $2.3 billion in the year to date, compared to $1.8 million recorded in the CBD. Colliers International managing director of capital markets and investment services, John Marasco, says this points to increasing attention being paid to non-CBD assets.

"Analysis of sales volumes in Sydney, Melbourne and Brisbane, when comparing metro office to CBD office markets, sees investment levels weighted towards CBD markets. However, as CBD office yields have compressed sharply, capital has begun to shift to metropolitan office investment in 2016," says Marasco.

"The recent tussle for control of GPT's metropolitan office fund, which contained 7 A Grade fully leased assets, is a sign of the sentiment to come for securely leased, high quality metropolitan assets, which is likely to lead to a further sharpening of yields."

While domestic buyers represent the bulk of transactions, momentum is tipping back towards offshore investors in 2016 Deutsche Bank, Accendas and Blackrock have all made significant metropolitan purchases in the year to date.

CBRE has also reported increased focus on Australia from Middle East Investors.

"Total investment volumes are still heavily skewed towards domestic investors, with local knowledge and teams on the ground giving them a strategic edge on offshore competitors," Marasco says.

"However, with the increasing maturity of Asia Pacific and European investors in the Australian market we anticipate rising levels of offshore interest in the medium term.

"Yield spreads will prove too attractive, and metropolitan spreads relative to CBD spreads will narrow under the weight of increasing investment."

Colliers reports that yields for prime grade assets have dropped across all the major eastern seaboard markets, where they are in the low 7 per cent range, except for Brisbane, where they have remained stable at 8.1 per cent.

Luke Dixon, Colliers International director of research, says the combination of lower vacancy, falling supply and higher total returns would typically correspond with a fall in initial yields and tight pricing.

However, in the case of A Grade metropolitan office, yields had remained firmly higher relative to their CBD counterparts and compressed at a slower rate over the past three years.

"CBD A Grade yields have compressed by over 120 basis points across the east coast, whereas east coast metropolitan A Grade yields only compressed by 60 basis points," he says. "

According to Colliers International's new H2 2016 Metro Office Research & Forecast Report, rental growth has been seen in most major metropolitan office markets this year, with demand for space generally improving, resulting in decreased vacancy.

The report found residential conversion remained a key issue in most markets, in particular those markets which were not protected with a commercial zoning. Both Sydney and Melbourne recorded a drop in commercial office space in H2 2016, as offices were converted to apartments.

"Residential conversion-driven withdrawal is shrinking the pool of available metropolitan assets," Dixon says.

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