Month-In-Review-March-2015

Month in Review
March 2015
Victoria
Melbourne
Melbourne’s CBD has seen a decrease in vacancy
rates with the Property Council of Australia (PCA)
reporting total vacancy of 9.1% in the January
2015 office market report, an increase of 0.6%
from the total vacancy observed in July 2014. The
vacancy rate is currently lower than the January
2015 national average of 10.8% and the ‘Australian
CBD’ vacancy rate of 11.2%. The PCA reports that
a significant amount of space will come online
over 2015 (121,335 square metres with 71% precommitted)
and 2016 (a further 55,000 square
metres with an undisclosed level of pre-commitment).
Leasing incentives remain high currently at
approximately 25% to 30% for office space within A
and B grade buildings with reports of up to 40% for
such buildings with relatively high levels of existing
vacancy. A number of suburban tenants have taken
advantage of the relatively high incentives on offer in
the market place by relocating into the city.
Strong overseas investor demand is continuing for
good quality office properties within the Melbourne
CBD and St Kilda Road office markets. This is
primarily due to the lack of suitable stock on the
market and sheer weight of capital seeking limited
investment opportunities in this segment of the
market. Assets in the $15 million to $50 million price
point typically appeal to a broad range of private
investors, syndicates and Self Managed Super
Funds (SMSF). The primary overseas demand is
from Singaporean, Malaysian and Chinese private
investors. The Melbourne CBD is currently an
attractive destination for Asia Pacific investors,
primarily due to the relatively high return and low
risk profiles of these CBD assets compared to other
major cities within Asia.
It is predicted that prime to A-grade CBD office
buildings should continue to attract strong demand
from both local and overseas institutional buyers
and sovereign wealth funds. If anything, overseas
interest will continue to grow as the next wave of
demand comes from Chinese sovereign wealth and
pension funds. Recent sales activity suggests that
market yields are firming for well located investment
grade assets exhibiting sound fundamentals, such as
strong lease profiles and limited capital expenditure
requirements.
As an example of this we note the recent sale of 27-31
King Street, Melbourne which was purchased by a
local private investor. This is a five level boutique
freehold office building of approximately 1,788
square metres, incorporating ground floor retail,
which was originally constructed in 1912 and most
recently refurbished and extended in 2009 to 2010.
The property was purchased for $13,688,888,
representing a capital value rate of $7,656 per
square metre and a passing yield of circa 6.5%.
The property was sold via an EOI campaign and
our enquiries indicate that there was considerable
depth to the interest in this property with multiple
competitive bids received from prospective local and
international purchasers.
Overseas developers in particular
remain extremely active within
the market place at present and in
many cases appear to be pricing
local developers out of the market.
Given the weak leasing conditions and potentially
substantial re-leasing and refurbishment costs
for older office buildings, we are witnessing many
overseas developers secure in some cases, quite
substantial office buildings with the view to convert
or redevelop for residential purposes.
Our overall observations are that due to limited
opportunities and substantial capital inflows,
Commercial
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