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Melbourne’s central business district’s (CBD) office market is poised to be an investment hot spot as vacancies are expected to fall below 5%, paving the way for solid growth in net face rents, says a director of an international real estate consultancy.
Vacancy in Melbourne’s CBD has been trending downward for the past 18 months towards 5% and this trend is likely to continue as short-term demand is expected to exceed supply until 2013, CB Richard Ellis (CBRE) Research and Consulting associate director Glenn Lampard tells The Edge. “While initial yields for prime stock had already tightened with recent sales achieving initial yields from under 7% to just over 8%, they are generally providing for internal rates of return of between 9% and 10%,” he adds.
“All Melbourne office regions are currently providing for positive net absorption scenarios, with the CBD in particular having achieved the highest level of increased occupied stock [by sq m] of any major capital city in Australia for the past two years.”
According to Lampard, significant demand will drive the construction of pre-committed offices in Melbourne’s CBD, citing the Docklands’ district in particular as a hot spot as many pre-committed offices are coming up there.
Lampard also points to a spillover effect of Melbourne’s CBD into the suburban markets where vacancies have also reached historical lows as a loss of sites originally planned for offices to the more robust residential market has helped to grow rentals sooner than expected during the post-global financial crisis recovery period.
“Melbourne’s office markets achieved rental growth of up to 10% in some suburban sub-regions while healthy yield compression of up to 75 basis points was also recorded.”
Prime assets dominate commercial market
According to Lampard, asset values of commercial properties in general have recovered this year after the global financial crisis, with markets under pressure, such as retail, showing resilience.
He notes that prime assets were the mainstays of transactions, with secondary assets generally left behind.
One example of a prime property transaction was DEXUS Wholesale Property Fund’s (DWPF) acquisition of Riverside Plaza at 452 Flinders Street within Melbourne’s CBD, says Lampard.
The fund had purchased the 22-storey commercial office tower from Stockland Property Group for a net purchase price of A$193.6 million. Riverside Plaza is currently 97% leased with a weighted average lease expiry (Wale) of 4.9% years by income to a “blue chip tenant base including Sinclair Knight Merz, ANZ, SPI Electricity, Primus Telecommunications and the Victorian Police”, he says.
The building is classified A-grade and has a 4-star National Australian Built Environment Reporting System (Nabers) rating.
The tower comprises a three-level basement car park, ground floor retail, mezzanine level office, auditorium and gym and 17 floors of office space. In total, it contains 38,317 sq m of net lettable area.
“The current risk-adverse nature of the investment and debt markets has kept the spotlight on those assets with solid tenancy covenants and dynamic attributes such as strong catchment areas, proximity to road infrastructure [and so forth],” he says.
However, Lampard says Melbourne’s overall property market still has weakness in several economic indicators that affect property demand growth, with retail, hotel room nights occupied and tourist arrivals continuing to lag behind longer-term averages.
“The forward-looking indicators do not show much in the way of relief in the short term with consumer confidence being only moderate, household savings rates continuing to climb, building approvals and finance continuing to fall and population growth slower than it used to be.”
Residential market subdued in short term
Melbourne’s residential market is subdued despite population growth due to concerns over the higher cost of living and global economic turbulence.
The residential market in Victoria, in which Melbourne is the capital city, is still one of the more resilient markets in the country.
However, the market is set to improve with a sustained period of economic growth and the return of buyer confidence.
“By virtue of the downward adjustment of values while retaining rental levels in a low vacancy environment, yields for investment properties have generally increased in the Melbourne housing market. Low vacancy levels are expected to provide upward pressure on rents, which should further increase yields on residential investment stock,” says Lampard.
According to figures released by the Australian Bureau of Statistics on Jan 10, the number of homes approved nationwide increased 8.4% in November last year. In comparison, approvals in Victoria reached a whopping 39.9% — the highest in nine years — placing it well ahead of national long-run averages.
He opines that this may be related to Melbourne being recently voted as the most liveable city in the world, according to the Economist Intelligence Unit’s (EIU) liveability survey.
Retail and industrial to hold their own
The retail and industrial markets are expected to hold their own in terms of values as investor interest is expected to buoy the former and keep pressure on yields while the latter will be propped up by tightened supply.
“Rents remained stable for the most part although interest by international retailers such as Zara wanting to be located in our prime CBD retail strip significantly lifted rentals in that precinct by around 8% through 2011.
“While vacancy levels remain quite low in the CBD [approximately 2%] there has been a change in the retail make-up of the tenancy mix with more focus on food traders, threatening the long-term dominance of fashion tenants.”
He adds that the retail sector remains solid despite a relatively subdued investment market.
“So rare is the opportunity to buy into investment grade retail, particularly shopping centres, in Melbourne that whenever something comes to the market [even for part interests], there is considerable demand and this has been reflected in the tight yields.”
Meanwhile, the industrial market is starting to improve, underpinned by a general increase in container traffic through Australia’s largest port, the Port of Melbourne.
A tightened supply of industrial properties prior to the financial crisis has also caused demand to outstrip supply and a demand for industrial land to return, says Lampard.
While values are lower than before the financial crisis, there has been healthy growth, he adds.
“Given the development market is primarily pre-commitment-led, there are also signs of pre-commitment rental levels above the market rents for existing premises.”
Lampard says the industrial market is careful in light of Europe’s banking problems and the investment market as its properties are centred around very high-quality units with strong rental agreements.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 901, Mar 12-18, 2012
