Record Year For Melbourne Office Yields

Melbourne office investment yields have reached a record low, with average prime yields pushing below 6 per cent for the first time, according to the latest research from CBRE’s Office MarketView.

2015 saw another bumper year for office sales in Melbourne with circa $4.2 billion of office investment sales transactions, second only to the record year of $5.5 billion in 2014 and well-above the 10-year average of $2.4 billion. Rising demand, particularly from foreign investors has driven the sharp yield contraction. As at Q4 2015, prime yields in the Melbourne CBD averaged 5.9 per cent, a year-on-year decline of 60bps. The previous low was 6.3 per cent in Q4 2007, at the peak of the cycle, pre-GFC. Secondary yields have also reached record lows tightening by 25 basis points over Q4 2015 to a new low of 7.0 per cent.

CBRE Associate Director, Research, Felice Spark said the $675 million sale of a 50 per cent stake in Southern Cross Towers had assisted in resetting market yields in Melbourne, with the sale struck at a yield of circa 5.1 per cent.

Capital values now average $8,388 per sqm for prime office and $4,750 per sqm for secondary, reflecting year-on-year rises of 11 per cent and 10 per cent respectively.

Supporting growth in capital values has been rising interest from foreign investors, who in 2015 accounted for approximately 56 per cent of the total sales volume in the Melbourne CBD.

“Also supporting growth in capital values and yield compression is the expectation by the market that office incentives are at, or close to, peak levels, with some recovery in net effective rents forecast over the coming years. Growth in underlying land values as a result of the residential development boom has also contributed to rising capital values,” Ms Spark said.

In the Melbourne CBD office leasing market, positive net absorption was recorded for its 12th consecutive year, estimated at 127,500sqm. Absorption is expected to remain positive over the next three years off the back of positive growth in white collar employment and tenant migration from the outer precincts into the CBD.

Prime net face rents grew 0.7 per cent over the year, while in contrast secondary face rents recorded moderate growth at 1.6 per cent year-on-year.

Minimal growth in face rents, coupled with higher incentives, have curtailed growth in net effective rents which were largely unchanged over 2015, averaging $334 per sqm for prime and $226 per sqm for secondary. Incentives, which have been rising for over five years, are now expected to have reached their peak, though are forecast to remain at current levels over at least the next 12 months.