- Supply pipeline the elephant in the room -
March 8, 2019 – Investor appetite for Brisbane office assets, which has driven an average 180 basis points fall in yields in recent years, looks likely to continue over 2019 aided by falling vacancy, forecast effective rental growth, and tight investment markets in Melbourne and Sydney, according to independent valuer m3property.
However, despite the positives, the leasing market remains sluggish and with around 20 new office buildings at various stages of the development process across inner Brisbane, the elephant in the room remains the available office supply pipeline.
An analysis of key investment sales across the inner Brisbane office market by m3property’s Director of Research in Brisbane, Casey Robinson, found that while average yields had tightened, the wide yield spread of 6.5% to 10.25% between secondary and prime assets in 2015 had also contracted to a current range of 5% to 7.5%, representing a yield spread reduction of 125 basis points.
“While significant yield compression has occurred, the spread between secondary and prime asset yields has also significantly contracted, and indicators suggest that this trend has further to run.
“One of the key drivers of further yield spread compression is that currently Brisbane yields remain quite attractive when compared with the considerably lower yields on offer for comparable assets in Sydney, Melbourne and offshore.
“That comparative advantage and the improving vacancy rate, along with expected rental growth, has added to the mix of investment attributes driving the strong demand for inner Brisbane assets,’’ Ms Robinson said.
Vacancy rate down 20%
According to the latest PCA figures, Brisbane CBD’s vacancy rate is down 20% from a near post-GFC high of 16.2% in January 2018, to 13% in January 2019 – the lowest vacancy rate since July 2013.
The reduction primarily occurred in the A-grade sector (circa 42% of total CBD space) which reduced from 12.8% to 9.9% over the 12 month period.
Ms Robinson said she expected the falling vacancy rate would contribute to growth of prime effective rents over 2019/2020 – as a result of both increasing face rents and declining incentives – with prime rents forecast to grow at a compound annual rate of 3.4% over the next decade.
According to m3property Director, Michael Coverdale, yields are likely to stabilise, however further compression is possible but will depend, to some degree, on how the leasing market performs over the shortterm or until known supply additions are absorbed.
“The fall in vacancy is primarily due to flight to quality, the expansion of State Government requirements and stock withdrawals from the market. The broader leasing market is still hurting and with many new office buildings at various stages of the development process across inner Brisbane, the conundrum is the available office supply pipeline, particularly in the context of declining workspace ratios driven by cost efficiency-led consolidations, more flexible working arrangements and technological advancement.
“However withdrawals and repositioning of inefficient secondary stock, new infrastructure projects and broad industry growth led by tourism, education and more recently, the resource sector, will help to negate oversupply concerns and is giving confidence to the leasing and investment markets, ’’ Mr Coverdale said.
m3property investment data reveals over $2.3 billion of office buildings were transacted across inner Brisbane during 2018 (sales over $5m), 4% higher than the five-year average. A strong offshore contingent included such firms as JPMorgan, M&G, Hines, Rockworth Partners, Firmus Capital and GIC.
Key sales were Charter Hall’s purchase of 61 Mary Street for $275 million on a yield of 5.54%, M&G Real Estate’s purchase (50% share) of 80 Ann Street for $419 million (5%y), and Heitman & Abacus Property Group’s $170 million acquisition of K2, 2 King Street, Fortitude Valley (5.82%y).
“With drivers such as Australia’s stable investment environment, cautious monetary policy outlook, attractive yields, an improving leasing market, the conducive value of the Australian dollar, and more desirable lease terms than those across the Asia Pacific, demand from offshore investors seems likely to continue to be a key driver of the Brisbane office market,’’ Mr Coverdale said.