Brisbane’s office markets are starting to feel the positive effects of an economic turnaround in Queensland.
These improvements are on the back of a nation-leading labour market, as well as population and economic growth numbers.
Savills Commercial Sales, Capital Transactions and Office Leasing teams have delivered a series of successful transactions over the past 12 months, with the Brisbane market indicating that investors are now more inclined than ever to back the Brisbane story.
Commentary from Robert Dunne, Director of Commercial Sales
2018 has been a year which represents extremely buoyant conditions for Queensland in comparison to some of the other states.
Tier one assets and good locations continue to sell at record prices, while tier two property is selling at much better value with more attractive terms.
2018 was a triumphant year for:
- Stand-alone commercial assets with holding income
- Sub-optimal apartment development sites suitable for owner-occupiers and empty-nesters
- Sites suitable for development of aged care or childcare facilities
Perhaps the most interesting shift in the market this year was the wide-spread acceptance of suburban investments with holding income and upside as a low-risk investment class, with yields falling sharply as investors clamoured to secure such assets.
We have also seen that amalgamated properties are often worth more individually than as a combined total in the current market conditions.
In the past, buyers have opted to purchase adjoining properties assuming the two combined will be worth more, however conservative funding in the current property cycle is driving values up on individual lots.
Developers are looking for financially feasible options to produce better quality product and returns and as a result are not always looking to maximise the development potential of the site.
Savills has seen an example of this trend recently when concluding the sale of 104 Sherwood Road, Toowong. While the property had a DA in place for 12 apartments across 4 levels as the highest and best use of the site, the purchaser has opted to build 6 town houses over 3 levels.
Savills Commercial Sales has also recorded a spike in the Aged Care sector over the past year.
In the past, Aged Care feasibilities exceeded the values on many properties around Brisbane, however new architecture concepts have reinvigorated this space.
An example of this has been the recent development of Aveo’s Aged Care facility located at the Gasworks, Newstead. The development is Brisbane’s first 19 level, resort-style retirement and aged care community which will feature luxury facilities positioned amongst a new vibrant retail hub.
Commentary from Peter Chapple, State Director, Capital Transactions
2018 was a year of renewed optimism for purchasers.
Activity has been driven by vendors taking advantage of strong investor demand and purchasers increasing focus on Brisbane due to the volume of capital they are looking to deploy and the relative value proposition in comparison to other markets such as Sydney and Melbourne.
Savills has also recorded an increase in foreign investment activity. In 2018 YTD, 54% of total investment volume across the Brisbane office market above $10 million involved foreign capital.
We have seen a tightening of capitalisation rates for core assets, particularly premium, and increased capital entering the Brisbane CBD from private investors domiciled in Asia, particularly Hong Kong & Singapore.
Brisbane’s capital markets also witnessed an improved appetite from domestic investors as the relative value proposition strengthens in comparison to Sydney and Melbourne.
The most notable institutional shift was seen with Charter Hall’s robust investment activity, recording five CBD transactions totalling more than $630m, supported largely by the purchase of 61 Mary Street from QIC for $275m.
As a result, Charter Hall has significantly increased their Brisbane CBD office footprint and now owns the most Brisbane CBD office assets by number. Together with Dexus, the largest CBD owner by net lettable area, these two institutional owners now control approximately 23% of Brisbane CBD office buildings over 5,000sq m in terms of total net lettable area.
2018 stood out as one of the strongest years for the Brisbane CBD office investment on record. In the twelve months to December, Savills recorded further yield compression and capital value appreciation across all buildings grades.
Average Premium and A Grade office yields each tightened approximately 35bps to 5.40% and 5.90% respectively, with B Grade yields compressing more strongly, on average, approximately 65bps. This B Grade result is a direct reflection of improved liquidity across this building grade, responsible for more than 60% of total annual CBD office investment volume in 2018 YTD.
A Grade capital values have continued to rise and as at December 2018, A Grade average was $10,000/sq m. This uplift represents 11% growth year-on-year.
Given that only a relatively small number of A Grade and Premium Grade office assets have transacted over the last 18 months, yields and capital values across these building grades are likely to be reengineered when a prominent asset formally comes to the market for sale.
In the case of 2019, we expect to see further tightening of capitalisation rates for core assets, with a number of assets earmarked to come to market in Q1 along with owners readying for divestment in the next 12 months.
Commentary from John McDonald, State Director of Office Leasing
2018 has demonstrated another active year for the commercial office leasing market.
The last twelve months has seen an improvement in sentiment across the Brisbane office markets, which has been fueled by good tenant demand fundamentals and business expansion.
With a focus on fitted or built product, Savills has recorded 70% of tenants opting for fitted space based on leasing activity under 5,000sq m with the majority of this activity being sub 500sq m.
Tenants have been attracted to significant capital expenditure as landlords across the city look to reposition their assets.
The financial precinct continues to be the preferred location amongst these tenants due to business connectivity and its close proximity to Brisbane’s premier dining, entertainment and shopping precincts at Eagle Street Pier and Queen Street Mall.
Buildings such as 100 Creek Street, 66 Eagle Street, 345 Queen Street and 15 Adelaide Street have all undergone, or are in the process of significant ground floor lobby refurbishments in order to enhance building presentation and improve tenant amenity and retention.
We are seeing leading innovation in lobby refurbishment, with the $10 million upgrade of 100 Creek Street including the first integrated state-of-the-art digital canvas wrapping around the lobby lift core.
Into 2019, we expect prime office space to remain a focus for tenants of all sizes active in the market. Flight to quality and speculative suites remains at the forefront of market trends as economic improvements and market confidence continues to drive the road to recovery.
Prime office vacancy is likely to tighten further, prompting a number of landlords to edge face rents upwards. Despite the resumption of Transit Centre, the secondary market may continue to face headwinds, however a number of building owners employing repositioning strategies to compete strongly for tenants.