By Daniel Wolman – Colliers International
The Melbourne CBD middle market performed strongly throughout 2019, continuing its momentum from the preceding year, setting record capital value rates and sharp yields. This momentum is expected to continue in 2020.
Overall, the market performed exceptionally well last year with a total of 15 middle market assets transacted between $10 million – $100 million. Total transaction volume for these sales was around $529 million averaging a capital value rate of around $13,000 and a sharp yield of 2.5 per cent.
The office investment market was fuelled by the record low vacancy rate of 3.3 per cent, one of the lowest vacancy rates we have experienced since 2008. This translated into the sustained rise in rents and capital values, which led to the further compression of yields.
The historical low cash rate that was cut to the current 0.75 per cent arguably fuelled the confidence of the commercial investment market, as it provided a lower cost of borrowing, coupled with an increased appetite for quality commercial property offerings from investors and add-value players.
The shortage of stock also saw institutional players entering the $10 million – $100 million price bracket traditionally not looked at by institutions, which further boosted demand.
Colliers International successfully transacted the sale of Swann House at 22 William St, which demonstrated a sharp yield of 2.55 per cent, in which sub three per cent yields have become increasingly common place. 45 Exhibition St transacted in April 2019 also boasted a record high capital value rate of $17,562 and a yield of 1.33 per cent. Another record yield and cap value achieve by the Colliers Melbourne City Sales team.
An overarching trend we saw in the market was the emergence of the build-to-rent development model, whereby developers and their financiers construct multi-unit developments, retain them and lease them out instead of selling them. This model presented an enormous opportunity for capital inflows into Australia and its feasibility was greatly improved with more favourable land tax and GST regulation changes in Australia.
Fund through transactions were another defining trend of 2019. Within the robust office leasing environment that was, fund through deals were heavily driven by pre-commitments. These transactions did not generally fall within the $10 million – $100 million price bracket, nonetheless they illustrated the emerging trend that was seen in the market and adopted predominantly by institutional players. Such transactions have become increasingly relevant in city fringe locations, such as Richmond and Cremorne where office leasing stock has been tightly held. The sale of 17-21 Harcourt Parade, Cremorne for $100.1 million (by Colliers), where MYOB has pre-committed for 10 years epitomised this nature of transaction.
Ultimately, the extremely tight nature of middle market assets within the Melbourne CBD, coupled with the record low cash rate, and positive investment sentiment will continue to fuel and provide continued momentum for another successful year.
2020 has already been earmarked by the market leaders as an even greater year than 2019 with several high-profile transactions and marketing campaigns expected to be announced to the public later in the first quarter.