_Australian office market investment activity higher in 2017

Office sales ($10 mill+) transacted during 2017 totalled $17.09 billion, which is 4% higher than 2016 and reflective of both increased asset prices and greater availability of stock for sale.

Across the office investment landscape offshore investors remained the dominant purchasers in 2017, accounting for 43% of all sales. This was followed by unlisted funds/syndicates with 26% and AREITS slightly more active this year with 9% of purchases by value.

CBD Markets

Investment activity resurged within the CBD markets, recording $11.26 billion in sales across Australia—up by 30% on the supply-constrained transaction activity of 2016. Both Sydney CBD (up by 28% to $4.98 billion) and Melbourne CBD (up by 70% to $3.34 billion) led this resurgence and between them these two major Australian CBDs accounted for 74% of all CBD transactions. The Brisbane CBD cemented itself as the premier alternative CBD market with 13% of CBD sales in 2017 while the ACT also saw increased CBD activity, accounting for 4.5% of CBD transactions, on a par with Perth (4.5%).  

Non-CBD Markets

After a break-out year in 2016, when $7.80 billion in transactions were recorded across non-CBD markets, almost outweighing activity in the CBD markets, 2017 saw a more normalised level of transactions with $5.84 billion recorded. This fall of 25% was due to a  re-focus by core investors on CBD markets and limited large-scale, core, non-CBD stock remaining available to the market. The dominant non-CBD markets were Sydney with 52% of transactions followed by Brisbane at 23%, due to the Brisbane Fringe market having a record-breaking year. Melbourne accounted for 18% of the non-CBD transactions with the ACT at 4%. 

The resurgence of investor focus on the key core CBD markets of Sydney and Melbourne in 2017 is clear to see. Concurrently, however, investor interest has been broadening to encompass new markets with other CBDs (i.e. Brisbane, Adelaide) and non-CBD markets outside of Sydney and Melbourne also attracting greater activity.

Yields & Outlook

Due to the strong purchaser competition, 2017 continued to see contraction in yields with a further 20-30 basis point tightening across the board. Prime core assets in Sydney and Melbourne CBDs are now regularly transacting on sub-5% core market yields, with the appetite for these assets un-diminished.

The deep pool of investors for trophy assets will maintain the pressure on core yields. However tighter debt markets and increased cost of funds remain likely to emerge during 2018, although to date increases in bond yields have been un-sustained.

The US begins 2018 with the Federal target rate 75bps higher than a year earlier and further unwinding of expansionary monetary policy is firmly on the radar for 2018. The recently announced change to the US corporate tax rate, reducing to 21%, has the potential to trigger repatriation of US funds/profits and also draw further investment allocation into the US market.

This may accelerate both the official and market interest rate increases, which has the potential to flow through to global wholesale funding costs.

Demand for Australian office assets remains at particularly high levels at the start of 2018 with demonstrated rental growth in Sydney and Melbourne boosted by improving sentiment in the remaining cities. The stability of the economy and financial sector also encourages offshore investors to make Australian assets a key element of their portfolio.

Three years ago the spread between prime yields in Sydney and Melbourne to the 10 year bond rate was 400bps, currently it is sitting in the region of 230bps, indicating the degree to which Australian property has been re-priced.

Outside of financial market shocks Australian assets will maintain favour with investors in 2018, additionally the search for higher income returns will see continued diversification into non-core markets in 2018.

For further detail read the full report here.