Australian office investment passes $20 billion for first time ever

Office values will continue to grow in 2019 following another record year which saw investment in Australian office assets surpass the $20 billion mark for the first time, according to Colliers International’s latest report

In their new Capital Markets Office Investment Review they found, more than $21.9 billion worth of office assets changed hands nation-wide in 2018. 

It's first time that sales volumes have breached the $20 billion mark and the fifth year in a row that sale volumes have been higher than $15 billion.

It is an 15% increase on 2017 investment levels and an 84% increase on the 10-year average. 

Domestic purchasers were the most active in the market, purchasing 51% of all assets by total dollar volume, despite the largest single transaction – Oxford Properties’ buyout of the Investa Office Fund for $3.4 billion in December 2018 – being to a Canadian buyer. 

The report found "institutional investors dominated both selling and buying activity, buying 77% and selling 69% of the total transaction value. Private investors were net sellers of $1.77 billion."

John Marasco, Colliers International Managing Director of Capital Markets, said, "continued strong demand in Sydney and Melbourne, coupled with improving demand fundamentals in Perth, Adelaide and Brisbane, means that we expect ongoing yield compression and rental growth will be the driver for office capital value growth across most markets in 2019."

“We now have $260 billion worth of major transport infrastructure projects under construction or planned across 315 projects in Australia, up from $211 billion across 260 projects only three years ago. This spend is in response to the strong population growth, and will further boost property markets for years to come."

Anneke Thompson, Colliers International National Director of Research, said all markets recorded capital rate compression in 2018, with an average of 20 basis points of prime grade compression recorded across CBD office markets. 

“As at December 2018, we have recorded a remarkable 27 consecutive quarters of cap rate compression, with this compression cycle starting in June 2012."

“What is also notable is in 2018 we recorded the lowest level of compression since mid-2014, indicating that this cycle is nearing its end.” 

According to the report, employment gains are getting stronger. 

“The drop in vacancy in Australian office markets, from 9.6% in January 2018 to 8.5% in January 2019, has been a function of both reducing supply and solid demand. There is now 100,000sqm less office space in Australian markets than there was two years ago,” Ms Thompson said. 

“Compare this against a solid jobs market over the same time period – the seasonally adjusted Australian unemployment rate has dropped from 5.8% in December 2016, to 5% in December 2018, which represents an additional 682,000 persons employed – and the supply demand imbalance starts to become clear.” 

“While certain markets, such as Sydney and Melbourne CBD and Metro office markets, still offer investors the opportunity for good income growth over the next two years, the yield compression cycle is seen to be nearing its trough,” Mr Marasco said.

“Vacancy continues to decline in Brisbane and Perth, and the Adelaide CBD in particular saw a record ten CBD sales over $20million in 2018, totalling $902million. Yields in Adelaide remain higher than the east coast markets which has seen significant compression over the past few years. The Adelaide market is expected to remain strong, driven by rental growth, falling vacancies, decreasing incentives and all-time high business sentiment."

“Mergers and Acquisitions was a theme in 2018 and we believe will continue into 2019."

The report found 2019 would also be characterised by the rise of alternative lenders and “borrowing outside the framework”. 

“For office assets or funding requirements that don’t sit neatly within major bank criteria, alternative lenders, such as offshore banks, sovereign wealth funds, family offices, fixed income specialists, life insurance companies and debt funds, are most certainly open for business,” Mr Marasco said.