Foreign investors push Melbourne CBD office sales to record high

17 January 2018

$3.88 billion in sales make 2017 Melbourne’s strongest year

Office transactions in Melbourne’s CBD have hit a record high, with 20 deals brokered throughout 2017 for a total of $3.88 billion, a 207 percent increase on 2016 and more than double the 10-year average of $1.8 billion, according to Savills Australia’s latest Quarter Time Office research report.

The unprecedented results underpin a historically high year for greater Melbourne, including the CBD, fringe and suburb areas, which tipped a total $4.77 billion of office sales, marking the strongest 12 months since 2014.

Savills Australia Associate Director of Research, Monica Mondkar, said the CBD sales volumes were supported by strong investor demand taking advantage of the low interest rate and low yield environment.

“Foreign investment levels were at their highest on record last year,” she said.

“Out of the 20 office properties sold in Melbourne’s CBD, foreign investors purchased 14 for a total consideration of $2.62 billion.

“This buyer class dominated the market, making 55 percent of purchases by value, followed by trusts with 15 percent and funds with 6.0 percent.”

Ms Mondkar said developers had led vendor activity in the CBD, divesting their share of five prime office projects, including 839 Collins Street, 477 Collins Street, 447 Collins Street, 311 Spencer Street and 405 Bourke Street.

“Five fund-through deals totaling $1.88 billion were transacted at sub 5.0 percent market yields, which were also sitting at historical lows and coincide with the Reserve Bank of Australia’s (RBA) record low cash rate of 1.5 percent,” she said.

“These projects are slated for completion between 2019 and 2021.”

Ms Mondkar said that the Melbourne CBD vacancy rate had been contracting since December 2014 and would remain tight for the next two years, until new supply started coming online in 2019.

“This has led many developers to kick-start new office developments,” she said.

Savills Australia State Director of Capital Transactions, Ben Parkinson, said the skyrocketing office demand was being fueled by Victoria’s economic and population growth and growing full-time employment numbers, which were the highest in the country.

“The record spend in the CBD is in part a reflection of Melbourne’s livability status and projections that it is on track to become Australia’s most populous city,” he said.

“Other factors include the extremely close ties of Melbourne’s nation-leading education sector to off-shore investment, and the relative simplicity of Melbourne’s landscape, which has made it much easier for foreign investors to understand and transact.”

Mr Parkinson said the current yields being achieved across the city were another drawcard, particularly when compared to the Sydney CBD office market.

“We expect foreign investor appetite to remain buoyant for Melbourne assets, particularly those offering medium to longer-term WALEs,” he said.

Ms Mondkar referenced the US Federal Reserve System’s December 2017 meeting, which saw it raise its benchmark interest rates by 25 basis points, with three hikes forecast for the duration of 2018.

“This is contrary to the RBA’s indication, which suggests cash rates may continue to remain lower for longer in Australia, impeded by low wage growth, high household debt levels and a drag on inflation,” she said.

“For investors, this means that Australian commercial property is expected to remain attractive in 2018, as it will continue to offer cushioning against long-term bond yields.”

Mr Parkinson agreed that investors were anticipated to continue to choose healthy returns through property investment over risk-free bond yields.

“The fundamental difference in buyer activity will be to weigh up future income growth against the yield chase in the coming years,” he said.

“As interest rates rise in the US and lift yields, Australia – and in particular, Melbourne – will remain a lucrative investment destination for foreign buyers when compared to its global competitors in the capital transactions market.”