The Melbourne city-fringe office markets of St Kilda Road and Southbank set new benchmarks for their precincts in 2017, with offshore investors still active in both precincts.
The Melbourne city-fringe office markets of St Kilda Road and Southbank set new benchmarks for their precincts in 2017, with offshore investors still active in both precincts, according to the latest research from Savills Australia.
Southbank recorded the highest positive net absorption of all non-CBD markets nationally at 19,481sq m, while St Kilda Road’s face rental growth of 22 percent was the highest of all non-CBDs nationally, coinciding with the highest levels of office stock withdrawals at 38,634sq m. The precinct also recorded positive net absorption for the first time in three years.
Savills Melbourne’s Associate Director of Research, Monica Mondkar, said the city’s fringe markets had performed well as a result of strong tenant demand underpinned by healthy economic indicators, including population and employment growth.
Ms Mondkar said a limited office supply profile in the St Kilda Road and Southbank precincts had been a prominent characteristic of the market throughout the past five years, as developers permanently withdrew stock for hotel and residential conversions.
“While office stock levels in St Kilda Road have contracted by 16 percent in the past 14 years to now be at record low levels, the Southbank precinct saw a rise in stock for the first time since 2011,” she said.
“In the 12 months to December, St Kilda Road saw 14,872sq m of office space permanently withdrawn from the precinct, while Southbank withdrawals totalled 2,300sq m.
“In addition, development activity has been virtually non-existent since the development of 1 Queens Road in 2004 – and all major projects currently underway are for residential use, with no commercial developments earmarked for the future.”
Ms Mondkar said the permanent office stock withdrawals, combined with a lack of substantial new supply additions since January 2004, had led to declining vacancy rates in Melbourne's fringe markets.
“Falling stock levels have limited tenant migration, resulting in positive net face rental growth in both prime- and secondary-grade buildings,” she said.
“Net effective rents in the St Kilda Road precinct are now at historically high levels, ranging from $335 to $375 per square metre per annum for A Grade stock, an increase of 27 percent in the 12 months to December, and between $320 and $345 per square metre for B Grade buildings.”
Although displaying similar trends in supply and absorption, Ms Mondkar said St Kilda Road and Southbank showed contrasting vacancy levels.
“Vacancy for St Kilda Road was down from the historical high of 12.9 percent 12 months ago, to 7.2 percent in December, the lowest vacancy since June 2008,” she said.
“Southbank, on the other hand, climbed to 5.1 percent after recording the lowest vacancy rate in the country just six months ago.”
Savills Melbourne’s State Director of Capital Transactions, Ben Parkinson, said that while Chinese investment activity in Melbourne’s city-fringe areas had been impacted by Beijing’s curb on outbound investment, this had been counteracted by the foreign investment from Singapore and Hong Kong.
“In the past year, four out of seven office purchases in the fringe markets were all funded by Asian capital outside of China,” he said.
“Singapore- and Hong Kong-based investors went on a buying spree beyond the CBD confines to the fringe markets.
“Capital investment targeted office assets with lease expiries less than five years, offering future redevelopment or repositioning potential.”
Looking forward, Ms Mondkar said Victoria’s population and full-time employment growth, as well as current professional job advertisements, pointed to a sustained office demand environment.
“Continued improvement to the Melbourne Metro Tunnel Project may renew interest from developers for office developments in the city-fringe precincts in the medium to longer term,” she said.
Ms Mondkar said Melbourne’s fringe markets, which still offered a notable yield spread compared to the CBD, would continue to remain attractive to purchasers.
“Although the investment yields are now at historically low levels corresponding to the low-interest rates on record, this still provides cushioning against the long-term bond yields,” she said.
“As interest rates rise and lift yields in competing global markets, such as the US, Australian markets – especially the Melbourne fringe precincts that offer attractive yields – will continue to entice foreign buyers.”