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Market Insights

15.02.2019

Melbourne’s suburban office market takes centre stage in 2018

A hefty $722 million in larger suburban office assets of a total pool of $1.44 billion changed hands in Melbourne last year according to new CBRE data highlighting broader buyer demand and further yield compression.

The CBRE figures relate to office properties outside of the CBD and St Kilda Road office markets valued at between $10 million and $100 million.

CBRE Melbourne Middle Markets Director Scott Orchard said a total of 26 properties traded representing 50% of total sales volumes – continuing the momentum from 2017 when 24 properties traded for a total of circa $640 million.

“2017 was a year of notable yield compression and this continued into 2018, as domestic and international investors sought out long WALE assets, rental growth opportunities and land rich properties that could be positioned for future development cycles,” Mr Orchard said.

“We expect this trend to continue into 2019, with fewer opportunities in the ultra-competitive CBD fueling interest in Melbourne’s fringe and suburban markets and deepening the buyer pool, where investors perceive there to be less competition and better value.”

Mr Orchard noted that increased investor attraction to the Melbourne office sector meant that sales rates of $9,000/sqm to $10,000/sqm were becoming the new normal for quality city fringe offices, with average yields having contracted closer to 5% than 6% in the inner suburbs for A-grade and higher quality B-grade properties.

The average yield on sales tracked last year by CBRE Melbourne Middle Markets was 5.2% – 13% shaper than 2017.

Notable 2018 suburban deals included Abacus Property’s acquisitions of 52-484 Johnston Street, Abbotsford for $93.5 million and 105 York Street, South Melbourne for $49 million. Plus, two Hawthorn office investments in the Glenferrie Road precinct for sub-5% yields.

Other high-profile long WALE sales included 60-62 Maroondah Highway, Ringwood for $28,300,000 on a yield of 5.31% and the $25,930,000 sale of 107 Overton Road, Williams Landing on a yield of 5.4%.

“These sales represented the Sydney investor appetite for Melbourne office, and strong institution plus local private investor and international Asian buyer demand in the sector” Mr Orchard said.

Rental growth has been a key driver of heightened investor interest, with CBRE’s Gianni Macdonald noting that inner eastern suburban rents had increased by 10%-20% last year, with “green shoots” also evident for secondary property after years of flat performance.

“Tenant demand and rent growth in the city fringe in 2017 put pressure on inner east areas like Hawthorn in 2018, leading to rents for the best available space increasing from mid-$300/sqm net to the low-$400/sqm range,” Mr Macdonald said.

Heightened developer confidence in Melbourne’s suburban office sector had been another driver, CBRE Melbourne Middle Markets State Director Josh Rutman said, supported by the fact that Victoria’s unemployment rate was the lowest in the country and 23% below the decade average.

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