$2.2 billion spree buoys Brisbane office market

Written on the 18 July 2018 by Nick Nichols

$2.2 billion spree buoys Brisbane office market

The Brisbane office market, which has been slow to bounce back since the end of the mining boom in 2012, has finally swung into recovery mode following a $2.2 billion spree by investors, according to Savills Research.

The upbeat assessment comes a month after BIS Oxford Economics urged caution against expectations that the worst was over, arguing that the office market remained in oversupply and that despite new lease deals being struck, absorption rates were minimal.

However, the latest Savills Research Q2-18 Office Quarter Time report sees the office building investment figures over FY18 as clear evidence that green shoots are finally emerging in the Brisbane market.

It says the sales have defied expectations of a softening over the past year with the fringe market posting close to $1 billion in sales. This compares with $796 million in sales a year ago.

"Sales in Brisbane's fringe office markets were driven by interest from both foreign and domestic private investors driving up demand for assets in the $10 million to $50 million range, whilst domestic institutional investors were driving up demand for larger, more prized prime grade assets," says Peter Chapple, Savills' state director of capital transaction in Queensland.

"We expect this level of interest to increase considerably over the next six months as investors chase capital value growth relative to the other east coast markets.

"The Brisbane turnaround story is now taking shape, there is a genuine sense of improvement in the occupier markets and increased confidence from buyers looking to position themselves to take advantage of this dynamic."

The strong sales performance in the fringe market has been bolstered by a robust CBD market, which recorded $1.2 billion in sales in FY18. This is up from $1.1 billion in FY17.

The surge in sales has led to a fall in Brisbane's A-grade market yields which are down 0.5 percentage points to 6.15 per cent. Although tightening at a greater rate than southern capitals, they remain well above Sydney yields of 4.9 per cent and Melbourne at 5.2 per cent.

The soft point for the data was a lack of capital growth in the fringe market. However, the CBD market posted a rise of 4.4 per cent in capital values over FY18.

Shrabastee Mallik, Savills' associate director of capital strategy and research, says there will always be a marked difference between the CBD and fringe market in Brisbane.

"However, given the proximity of the fringe market to the CBD and the ongoing renewal of Brisbane's fringe office markets, the differences in prices and yields are much less pronounced than in other office markets nationally," she says.

Meanwhile, Chapple says there is anecdotal evidence that investor interest in the office Brisbane market will boost overall investment volumes in the latter half of the calendar year.
He says the Brisbane office market is benefiting from some of Australia's best labour market indicators as well as population and economic growth numbers.

However, BIS Oxford Economics is not banking on a Brisbane office recovery until the first half of 2020.

In a report titled Brisbane Commercial Property Prospects 2018-28 released last month, it argues that a buoyant market for investors is pushing new projects into the market earlier than needed.

BIS says Brisbane, with 300,000sqm of vacant space in the CBD, still has some of the highest office leasing incentives in Australia.

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Author: Nick Nichols

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