Investors Seize the Office Middle Ground

Surging demand in Australia’s office middle markets has defied lockdowns with local investors swooping on assets, taking advantage of low interest rates and an offshore capital competitive vacuum.

New data from Colliers shows that office assets in the $10-million to $150-million price bracket performed strongly during the past year on the back of local pent-up demand.

A total of 137 assets with a sales value of $4.78 billion changed hands across Australia’s office middle markets in 2021.

By comparison, 103 assets were sold in 2020 for a total of $3.59 billion.

Colliers national head of investment services Matthew Meynell said the growth during the past year had led to considerable yield compression and an increase in sales volumes in each state.

“We are particularly seeing assets within the $20-million to $40-million range being the most competitive and sought after as they accommodate the widest buyer pool, allowing for high-net-worth investors, privates, syndicators, and rapid-growing competition from institutional investors,” he said.

Significantly, the latest Colliers analysis indicates the strong growth occurred as the flow of offshore capital in the office middle market remained muted, accounting for only 11 transactions and 67.64 per cent below pre-pandemic levels.

The latest data also shows a big shift in the risk appetite of investors, resulting in a greater focus on metro and regional assets.

“One of the dominant themes in 2021 was the continuation of the trend of capital flowing into metro and regional office markets, as 2021 transaction volumes outperformed CBD markets with an extra 39 sales nationally,” Colliers Queensland investment services director Samuel Biggins said.

“Traditionally these markets have offered a yield premium to reflect perceptions of higher leasing and liquidity risk.”

Charter Hall’s $146-million acquisition of 6 Stewart Avenue in Newcastle on a 5.2 per cent yield and with a long-term government tenant in place highlighted the increased regional focus.

Overall, 88 metro and regional office assets within the office middle markets traded over the year, compared to 49 assets in the CBD.

In a sign of a further strengthening of the market this year, the analysis noted that the demand for metro assets had resulted in the average metro capital value of $7190 per sq m surpassing the 2020 average for CBD assets of $6174 per square metres.

This was largely underpinned by the capital value growth of metro markets in Victoria and South Australia, both increasing by more than 20 per cent.

The Australian Capital Territory scored a record year of growth with a 350 per cent increase in the number of transactions and a 2164 per cent rise in total sales from $26.5 million in 2020 to more than $600 million in 2021.

As a result, its capital values have soared from $4106 per sq m in 2020 to $7244 per sq m in 2021.

The nation’s strongest performer continues to be metro NSW, which accounted for 22 per cent of all transactions with a total value of $1.342 billion.

It now has the third lowest yield (4.32 per cent) across Australia, mostly due to the significant demand for office properties within the Sydney CBD fringe markets, including the Eastern Suburbs, Parramatta, and North Sydney.