Fringe office markets attract investors

Fringe office markets attract investorsA high level of interest from foreign investors in office property is driving up asset valuations across some locations, leading buyers to fringe areas in major cities, according to Australian Unity Real Estate Investment.Mark Lumby, head of property funds – retail at Australian Unity Real Estate Investment, said that over the past five years foreign investors’ appetite for Australian office property – once a relatively small component of their overall property allocation in Australia, has grown to be the largest sector. It’s “almost three times bigger than retail property, which was historically the most attractive,” he said.According to Lumby, more than 60 per cent of foreign capital directed to Australian property has been allocated to office investments since 2005.”In addition, a number of overseas residential developers are buying old office buildings and converting them to residential properties,” Lumby said.He added that AREITs are once again trading at a premium to their net asset value: 8 per cent as at 31 August 2014.”Coupled with strong interest from private syndicates in a low interest rate environment, these factors are all creating competitive tension and increasing asset valuations in some locations,” Lumby said.As a result, office property across some CBD locations is seeing high transaction volumes and pricing “to the point where investment returns are too low for some investors, such as institutional investors, to meet their investment objectives.” Lumby noted that, typically, such return objectives are CPI plus 5 per cent.Fringe areas – or the ‘secondary’ office market – offer good opportunities for office property investors, Lumby said.”For example, Parramatta (in Sydney) and St Kilda (in Melbourne) have both been delivering good, stable returns for investors. We have seen a number of superannuation funds investing in these areas as they offer the potential to better achieve the kinds of property returns they require.”Lumby forecasted that Sydney and Melbourne office assets are likely to continue with stable returns for some time.”There continues to be reasonable leasing demand for office space in these cities. Even though the development pipeline is strong – for example, the Barangaroo development in Sydney’s CBD, which, on completion, will represent approximately 5 per cent of Sydney’s CBD office space – there are a number of office buildings being converted to residential or hotel use, which, when coupled with the moderate levels of tenant demand, should keep a lid on vacancies.”However, for Perth and Brisbane the transition from construction to production in the mining industry may result in a drop in office demand in these CBDs.”At the same time, there are some major new developments coming online, such as Kings Square and Elizabeth Quay in Perth,” Lumby said.”This is creating a huge amount of supply on the market, and there simply isn’t the demand over the short or medium term.”The Australian Unity Real Estate Investment business has more than $1.6 billion in funds under management, with unlisted property funds and syndicates that own more than properties in the healthcare, retail and commercial sectors throughout Australia.