Secondary office stock showing potential in some areas
Secondary office stock showing potential in some areas
21 May 2014
Sydney, 21 May 2014- Investor focus is increasingly shifting toward secondary stock as they are forced to look towards alternatives given the growing difficulty in purchasing core stock.
CBRE’s Q1 2014 Office Marketview for Australia, reports that the Sydney CBD is best positioned for growth in secondary assets.
The demand for office is solid across the country. Foreign institutions, in addition to local listed trusts and unlisted funds, have been very active in the last 12 months. This is despite below trend net absorption and high vacancy rates since the GFC.
In the face of soft market fundamentals, strong investor interest has seen values grow – compressing prime yields by an average of 50 basis points in the Sydney CBD, 70 basis points in the Melbourne CBD and 85 basis points in the Brisbane CBD – since late 2009.
CBRE’s Associate Director of Research, Claire Cupitt, commented that although prime office stock is still the main focus, transactional activity in secondary stock is also on the rise.
“This may not be purely because core office stock is increasingly inaccessible. In certain markets there is potential for growth in secondary grade office assets, particularly those where the prime to secondary yield spread is wide compared to history,” said Ms Cupitt.
“The majority of yield compression seen to date has been seen in prime grade, highlighting that there may be value in select secondary assets.”
“This is most relevant in the Sydney CBD where we have seen a downward trend in secondary vacancy over the last few years to now sit below that of prime, supported by limited new supply”
The limited availability of core investment opportunities means investors are also looking to secondary grade buildings with development upside or repositioning strategies through capex injection. Some investors are also seeing the value in purchasing secondary grade assets for residential conversion.
State-by-state investment market
Following record volumes in 2013, Sydney’s CBD recorded another strong quarter, with just over $1 billion in sales. Sydney in particular continues to be an attractive market for both local and international investment. Major sales in the March quarter included 10 Shelly Street to GPT Group for $261.2 million; 135 King Street to Investa Property Group for $260 million; 255 George Street to AMP Capital Investors for $115 million (25%) and 495 Harris Street to a Chinese developer for $63 million.
The report states that above trend investment is expected to continue in Sydney, which has proved itself better placed than other markets with more balanced vacancy outlook over the medium term.
The fringe and suburban markets benefitted from a crowded Sydney CBD market. Two major sales transacted in North Sydney in Q1; 18 Berry Street for $50 million and 52 Alfred Street for $80 million. Parramatta has experienced strong sales for both 2012 and 2013, with the same trend expected to continue into 2014. The secondary market is also beginning to look more attractive to investors, particularly assets with the opportunity to upgrade to prime grade.
The limited availability of core investment opportunities in the Melbourne CBD has also seen yields tighten over the last 12 months,
The fringe markets are also active given the limited stock availability. Southbank in particular is seeing continued interest from developers willing to pay a premium for sites suitable for high density residential development. The Chinese developer, Eastern International Property Development, recently purchased 158 City Road for $22.5 million.
Brisbane saw a slow start to the year in terms of completed transactions, although investor appetite remains strong with both domestic and offshore capital searching for opportunities.
In the CBD, the $161.3 million AM60 tower was acquired by DEXUS Wholesale Property Fund. A record price was set in the non-CBD markets, as the German company Union Investment Real Estate acquired the Southpoint development in South Brisbane for $203 million.
Despite a weak occupier market in Perth, domestic and overseas investors continue to target prime office buildings with long term leases in place and minimal capex requirements. 2013 saw record high levels of activity in the CBD, although just one major transaction so far this year. 130 Stirling Street was purchased by Singaporean Real Estate company Hiap Hoe for $90 million.
Recently, Adelaide has seen limited transactional activity, however interest from institutional grade investors remains with several major sales over the past year. CorVal purchased 45 Pirie Street for $87 million and Charter Hall acquired a 50% stake in 26 Franklin Street for $29.5 million.
The rezoning of much of Adelaide’s fringe office market is likely to attract developers interested in acquiring sites suitable for residential projects and/or prime grade office development.
State-by-state leasing market
At January 2014, overall vacancy in the Sydney CBD sat at 9%, up from 7.2% twelve months earlier. Net face rents are expected to remain flat over the next six months as the market stabilizes before a steady recovery during the second half of 2014. Business services are expected to lead the improvement in demand in the short to medium term, supporting the improvement in general economic conditions.
The Parramatta office market remains buoyant in contrast to the CBD and other suburban markets. New entrants to the market and expansion of existing tenants have driven white collar employment growth in Parramatta, therefore driving new development.
There is improved enquiry in the Melbourne CBD leasing markets but absorption remains at low levels due to refurbished space and new office developments entering the market. 150 Collins Street and 720 Bourke Street will contribute to approximately 22,000sqm of uncommitted space being brought to the market.
The Brisbane office leasing market remains challenged and the first quarter of 2014 did nothing to ease this. Total vacancy rates in the CBD reached 15.5% in March, up from 14.2% at the end of the previous quarter. General tenant enquiry has risen, although this appears to be from tenants with expiring leases who are looking to take advantage of the lower rents and improved incentives on offer.
Perth CBD vacancy levels sit at 9% in the first quarter, up from 6.9% in July 2013. Recent demand has been driven by the state’s LNG gas projects, although a number are being axed which is leading to weak business confidence.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website atwww.cbre.com.au.