Commercial Reflection: Knight Frank Wraps Up 2016

It has been an eventful year in the industry’s commercial sector. Each state has seen some big transactions, which have been fuelled by a diverse range of factors and trends. Knight Frank have now provided their own commentary which reflects on the year that was and offering their professional opinion on what may be in store for 2017.

New South Wales

By John Bowie Wilson, Head of Commercial Sales, NSW

In the Sydney CBD, we are seeing record yields and record rents achieved. This includes B-grade buildings, which in some instances are going above $1,000 per square metre gross per annum. Just a year ago rents were at around $750 per square metre gross per annum.

Sydney Skyline

B-grade buildings in the CBD are also achieving record yields in the 4s. This is being driven by three key factors: the weight of money – the ever-increasing volume of buyers, cost of debt with all-time record low interest rates; global uncertainty from occurrences such as Brexit driving money into safe-haven locations; and the relative generous yields on offer in Australia when compared on a global basis.

The first half of the year saw a higher level of volumes than the second half, with the early part of 2017 expected to see increased activity. I anticipate volumes will return to become high again in the first half of 2017.

Victoria

By Martin O’Sullivan, Head of Institutional Sales, VIC

This year has seen huge demand for Melbourne property, and we’re anticipating that this will continue in 2017. Demand has been assisted by global events such as Brexit, with money looking for secure, less-volatile markets. Melbourne is seen as a steady market.Melbourne

Yields are continuing to firm, and we are starting to see real signs of rental growth. This has supported demand for A-grade assets in Melbourne.

We’ve seen the Chinese move into more income-producing property, as opposed to purely development-related residential assets.

Key commercial activity

  • Southgate, sold for $580 million at a 6.5% yield
  • 1 Collins Street, sold for $125 million at a 5% yield
  • ANZ at 100 Queen Street, sold for $287.5 million at a yield in the low-6s

Queensland

By Justin Bond, Head of Institutional Sales, QLD

The Brisbane CBD has experienced increased investor activity, mainly for well-located, stabilised assets. There’s without doubt a strong inflow of capital in to Brisbane.

The inability to successfully acquire assets in Sydney and Melbourne has resulted in stronger demand for higher yielding investments in Brisbane.

brisbane

Brisbane offers a stronger yield proposition, with interest building for greater risk.

I anticipate that 2017 will be very similar to 2016, with activity in the market ramping up and owners looking to divest their assets once stabilised.

We will continue to see stronger interest from offshore groups into Brisbane due to the lack of opportunities in Sydney and Melbourne.

Key commercial activity

  • Strong increase in bidding for stabilised assets such as 300 Queen Street –Seymour Group to ARA at a yield of 6.7%

South Australia

By Guy Bennett, Joint Managing Director, SA

We are seeing an unprecedented number of potential new entrants circling the market, and a near-record number of major transactions in the last 12 months.

Global players such as Blackstone, Starhill REIT and Credit Suisse are circling while Charter Hall, Lendlease, CBUS and DEXUS are the biggest investors in the Adelaide market.

Rundle Mall, Adelaide

Adelaide is seen as a good value proposition and a safe haven in a volatile global market. Major players are still trying to unlock assets and buy into the market.

The $5 billion of government infrastructure on the riverbank is very appealing to offshore groups. This infrastructure is based around education, medical and research. Adelaide still offers relative value in comparison with Melbourne and Sydney.

Next year, the market will continue to offer value and we anticipate the flow-on from other markets will remain strong.

Key commercial activity

  • Westpac House, sold for $90 million to ICAM
  • 25 Grenfell Street, sold for $135 million to Credit Suisse
  • 45 Pirie Street for, sold for $100 million plus (currently under contract)

Canberra

By Nic Purdue, Associate Director, Institutional Sales, Canberra:

This year has seen transaction volumes in line with the outstanding result last year, and a number of deals are still to be announced.

On the back of this volume yields have compressed in both the primary and secondary markets and we expect this will continue into 2017. This year has also seen more first-time purchasers in the market than we’ve seen before.

Canberra City CentreThere’s a real focus in Canberra on urban renewal and asset regeneration. Office assets have been targeted for conversion to student accommodation, residential and hotels.

We’re expecting to see the trend of strong investment volumes continue into 2017. A number of buyers recognise that Canberra represents good value and are targeting a wide range of assets.

We’re also going to see improvement in market fundamentals. A-Grade vacancy is low and there is no new speculative supply forecast for the next few years. This will continue to have positive impact on the way that investors look at Canberra, particularly the CBD and Barton.

Some of the owners that bought well have seen a fair bit of upside in their value and we believe will look to capitalise on where the market is at the moment and trade out.

Key commercial activity

  • 73 Northbourne, sold for $29.2 million to South Haven Capita
    Long-term government renewals that have traded include:
  • 62 Northbourne, sold for $58.5 million to Ascot Capital
  • 111 Alinga Street, sold for $76.5 million to Prime Super
  • 14 Mort Street, sold for approx. $41.5 million to Ascot Capital

Western Australia

By Todd Schaffer, Head of Institutional Sales, WA

Vacancies have hit 21.8% as recorded by the PCA as at July 2016, and they may marginally decrease in January 2017. We’ve seen incentives increase to around 50% net.

We’ve seen a lot of leasing deals occurring off the back of this. Tenants are taking advantage of the market to lock in five, seven and 10-year leases. Our leasing team is busier now than they’ve been in the last two years.

The challenge for institutional investments is that, like everywhere else in Australia, we’re seeing a lack of good-quality stock.

perth

The stock that does come onto the market is for assets that have risk – particularly vacancy risk – with capital expenditure requirements. “One of the reasons it’s been a tough year is bank funding and weak leasing fundamentals.

We are seeing a mix of offshore and local interest in the market and starting to see national buyers coming into the market, looking at counter-cyclical plays.

Moving forward into 2017, I expect that we will see more stock come to the market – but it’s probably going to be value-add stock. In 2017-18 we’ll see the bottom of the Perth market. We’ll start seeing positive net absorption.

Mining and resource pricing has significantly increased and it appears prices may have stabilised, with rumour that BHP is taking its sub-lease space off the market for future expansion.

A few positive signs are starting to appear in the market. Equally, 80 Stirling Street and another building are under contract for alternative uses – 26,000 square metres will be removed from the market in 2017.

Key commercial activity

  • Exchange Tower, sold for low $100 million to Primewest
  • 12-14 The Esplanade, sold for $51 million
  • Forest Centre, sold for about $220 million to PUCH
  • Westralia Plaza, sold for for $87 million to Zone Q
  • 80 Stirling Street, sold for $35 million toHong Kong-based  GAW Capital.

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