News

2019 Review / 2020 Outlook – Capital Markets

Posted on 29th January 2020

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Pent-up demand for assets heading into 2020

Low volumes of quality stock brought to the market this year have seen demand for office investments across Melbourne build up heading into 2020.

Fitzroys Director, Paul Burns said Melbourne’s CBD and city fringe office markets continue to experience historically tight vacancies and rental growth.

“Investors are keen to capitalise on these strong fundamentals, but the limited number of properties on the market is seeing those that do come up being hotly contested.”

Burns said cashed-up buyers are pursuing returns from Melbourne office assets, which continue to represent a solid investment prospect.

“Secure leases remain sought after. The return on property against the cost of money is accretive,” he said.

According to the Property Council of Australia, Melbourne’s CBD vacancy is at 3.3%, making it the tightest CBD market in the country.

Burns said the biggest challenge to the market has been, and remains, funding.

“Secondary lenders have largely been filling the void created by the generally tighter lending conditions and the fallout of the banking royal commission, which has kept credit flowing.

“However, lending restrictions are easing and confidence in the market continues to rise.”

Burns said banks have been selective when it comes to properties with current and pending vacancies, which has put some upward pressure on yields.

“Strong demand from tenants for space will continue to present quality investment opportunities. There has been a spillover from the CBD to the city fringe and this is now extending through to the suburbs, and it’s only a matter of time before primary lenders jump back in.”

Assets in the city and the metropolitan region have continued to demonstrate uplifts in values.

“There has been a shortage of quality stock coming to the market, and there remains a considerable surplus of buyers for well-leased property,” Burns said.

Local purchasers, offshores, syndicates, funds, and high-net-worth investors all retain a presence, particularly on the value-add side, while strategic value-add investors and developers are active.

Offshore buyers are typically looking for landbank and value-add opportunities.

“Opportunities that have further development potential and offer flexibility and upside are also generating interest from the market,” Burns said.

He said vacancies in suburban assets take longer to fill, but there has been a meaningful level of change in suburbs influenced by the tight city market.

“Suburban assets continue to offer more affordable space for tenants. While large amounts of supply are expected to come online through the CBD in 2020, including Collins Arch at 447 Collins Street and the Olderfleet tower at 477 Collins Street, much of this is pre-committed and prospective tenants will seek opportunities beyond the city, which bodes well for rental growth.”

2020

Burns said office vacancies across the city fringe have been tightening to historic lows, and investors and tenants are increasingly looking to locations such as Abbotsford for opportunities.

Burns and Fitzroys colleague James Lockwood oversaw the $21 million sale of 112 Trenerry Crescent in Abbotsford to the Zagame family, following interest from local and international investors, developers, and partial owner occupiers.

Confident in the prospects of Melbourne’s commercial market, the new owners will refurbish and lease out the four-level, 4,252sqm building.

“The enquiry we saw for this asset, and more recently in our marketing of the former CUB headquarters at 2-6 Southampton Crescent, shows a broad range of market players are looking beyond the heated Richmond, Cremorne and Collingwood markets for city fringe opportunities,” Burns said.

“More Melburnians seek to live, work and go out in central locations, and this has proven particularly so for inner-suburbs with existing quality transport and lifestyle options.”

“Abbotsford is also a likely candidate for rezoning that will be more conducive to larger-scale office developments which will cater for the investment and tenant demand.”

Recent transactions have demonstrated the competitiveness of the neighbouring fringe markets. They include Bayley Stuart buying a second Cremorne building off the plan in 12 months for $50 million without a lease being signed, and Pace Development Group’s 51 Langridge Street project just changing hands for $31.6 million with just more than 50% leased.

The strong CBD market has also prompted a swing along St Kilda Road. After a period that saw stock withdrawals for residential conversion, commercial refurbishments are being now favoured over apartment projects, such as the recently transacted 424 St Kilda Road and the former police complex at 412 St Kilda Road.

Burns said the x-factor for market variables remains macro-economic events. Brexit, the US-China trade war, and tensions in Hong Kong can potentially have some sort of effect, but so far have not made much of an impact on the Melbourne market.

E-commerce and logistics boom rolls on

Rampant growth of e-commerce and heightened focus on supply chain efficiencies will see distribution and logistics centres riding a wave of value growth and popularity with investors for the foreseeable future.

Burns sold the Quiksilver facility in North Geelong to ASX-listed Centuria Industrial REIT for $22.8 million during the year. The 21,772 sqm facility is on a 3.763-hectare site and is used by the iconic surfwear brand as its Asia Pacific distribution centre.

Burns said there is heightened investor demand for strategically located logistics assets with quality fit-outs and strong lease covenants.

Quiksilver recently entered a new 5+5-year lease, and had made further upgrades to accommodate business expansion including additional warehouse racking, office refurbishment and refitting, and increased staff amenity.

“Growth in online shopping and demand for more efficient delivery and a bigger range of products across the retail industry has increased requirements for logistics systems and facilities,” Burns said.

“Industrial real estate is now among the most sought-after investment classes, and land values are expected to rise further in the coming years.”

Burns negotiated the last sale of the property in late 2016. Then, the facility was part of a package that included an adjoining 1.244-hectare development parcel of land - not included in the latest deal - which sold together for $19.5 million.

“A-REITs have substantially increased their share of transaction volumes, with a number of listed and unlisted funds now undertaking portfolio repositioning programs to increase their exposure to the logistics and industrial sector,” Burns said.