Chinese investment growth will continue to define commercial market: Colliers International
A stronger presence from domestic purchasers, yield compression, improved leasing conditions driving demand and investors moving up the risk curve to access stock are expected to be the key forces driving higher investment in Australia's CBD office market in 2014.
Colliers International’s latest CBD Office Research & Forecast Report for the first half of 2014 showed that more than $8.1 billion worth of CBD office buildings changed hands in 2013 - 16% above the previous year and the highest level of investment since 2007.
Australian and offshore institutions dominated buying activity and China emerged as the country with the strongest growth, purchasing $580 million of CBD office property in 2013, said the report.
"Growth in Chinese investment is expected to continue to define the market in 2014," said John Marasco, Colliers International managing director of capital markets and investment services.
"To date, most of the activity has been private Chinese investors purchasing secondary CBD office buildings however this started to change at the end of the year with the sale of Centennial Plaza to China’s sovereign wealth fund China Investment Corporation."
"We are now seeing growth in institutions from China purchasing offices for investment, as opposed to development."
While offshore interest is expected to remain strong Colliers believes 2014 will be the year that domestic purchasers make their presence known. "We are already seeing local demand competing, and in some cases winning, against the force of the offshore investors and this is set to continue further in the year ahead," said Mr Marasco.
"On the back of increased activity by A-REITs, superannuation funds and privates, we will start to see the pendulum swing towards the locals in 2014."
Colliers is forecasting yields to tighten further this year on the back of increased competition for assets and the weight of money.
Prime CBD office yields currently range from 6.75% in Melbourne CBD to 7.94% in Perth CBD. By the end of this year, Colliers is tipping yields will become firm in all markets with the exception of the Perth CBD.
Improved leasing conditions are also likely to drive demand for CBD office assets, noted the report.
“The ‘disconnect’ between a strong investment market and a weak leasing market has been a key feature of Australian CBD office markets over the past two years,” said Nerida Conisbee, Colliers national director of research. “We now consider that incentives have peaked in most CBDs and prime net effective rental growth is likely to occur in all markets with the exception of Brisbane".
Mr Marasco said that almost all indicators pointed towards increases in the amount of funds targeting Australian commercial property in 2014.
“Australia continues to be an attractive investment destination and provided that stock continues to come to market, total investment volumes should be greater in 2014 than they were in 2013,” he added.