Sydney and Melbourne CBD property buoyant
Seemingly insatiable demand from local and offshore investors continues to drive commercial property sales in Sydney and, increasingly, Melbourne, says Simon Fenn, Savills Australia’s managing director NSW.
Overseas investors and local institutions are snapping up commercial assets in both east-coast cities, with “the sheer weight of capital chasing property” driving the market, notes Fenn.
“The cost of debt is close to record lows,” he says. “And banks are giving very low returns so property looks attractive in comparison.”
Savills’ ‘World Office Yield Spectrum 1H/2015’ reported yields in core office markets worldwide of between 2 and 4 per cent. Commercial buildings in Sydney’s CBD, with Grade-A market yields of 6.62 per cent, outperformed all other 42 cities surveyed bar San Francisco (6.97 per cent), making this one of the most rewarding property investments in the world.
A record $4.7 billion of Sydney CBD office buildings transacted over 2014, with offshore money, mostly from Asia, accounting for $2.1 billion (45 per cent) of these sales and the rest coming from local institutional investors.
Australian super firms, flush with funds and looking for property fundamentals, are buying secure, quality properties with longer leases, says Fenn, “such as the Melbourne CBD CBUS buildings sold to Australian super funds AMP and GPT last year for more than a billion dollars”.
So far, the focus of Asian investors – mostly from China, Hong Kong and Singapore and starting to see interest from Taiwan, South Korea and even Japan – has been on buildings with long-term residential potential.
“They’ve done it in their local markets; now they’re looking for better returns than they can get at home,” Fenn explains. “They’re also looking to de-risk and diversify into markets around the world.”
For many Chinese investors, it’s also about acquiring key developments that build their brand images – as evidenced by last year’s sales of iconic Gold Fields House at 1 Alfred Street, Circular Quay, and landmark Sydney building 338 Pitt Street (pictured) – all destined for luxury residential development.
Earlier this month, Savills brokered a deal that saw prime Sydney CBD asset 130 Elizabeth Street sold to a Hong Kong-based investor.
More major deals are in the pipeline for 2015-16, with Australian owners looking to sell assets to take advantage of the weight of capital in the market, Fenn says.
In January 2015, indicative market yields for Sydney CBD Grade-A stock averaged 12.5 basis points lower than 12 months ago. And with offshore and local capital continuing to compete for a limited amount of stock, and likely further RBA rate cuts, Savills expects yields to compress further.
“As long as money remains where it is, we don’t see it changing in the short term,” says Fenn. “The Aussie dollar dropping has made our property even more attractive to overseas money, and values should continue to rise on yields tightening.
“We’ll likely see improvement in the leasing market, too – which, if it happens, will add value to some assets.
“The redevelopment and infrastructure this investor money will create will be fantastic for Australia going forward.”
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