The Australian office market recorded AUD 19.53 billion of transaction volumes in 2018 – the highest figure on record, according to JLL’s Australian Office Investment Review & Outlook 2019 report.
Volumes were supported by the acquisition of Investa Office Fund (IOF) by Oxford Properties for AUD3.4 billion. However, the number of office transactions was lower than previous years with the top 10 office transactions representing 43.9% of total volume in 2018.
Offshore capital sources remained active participants in the Australian office sector, acquiring AUD 9.46 billion in 2018. However, offshore investors are active on both sides of the ledger and divested AUD 6.57 billion in 2018 – an all-time record high.The most active offshore buyers in 2018 were from Canada (16.9% of total volume), USA (8.7% of total volume) and Singapore (8.6% of total volume).
Tangible signs of a leasing market recovery in Brisbane and Perth has increased the prevalence of counter-cyclical investors. The depth of investor demand is more diverse for assets in Brisbane, but the acquisition of Exchange Tower in Perth by GIC Real Estate is a sign of confidence in Perth’s medium-term rental outlook.
The Australian CBD office market vacancy rate trended back into single digit territory in 2018 (8.6%) – the lowest level since 3Q12. The Sydney CBD (4.1%) and Melbourne CBD (3.7%) are two of the tightest office markets in the world. The spread between prime and secondary grade vacancy rates is wider than historical benchmarks outside of Sydney and Melbourne with prime grade vacancy in Canberra (6.2%),Brisbane (7.2%) and Adelaide (9.6%) in single digit territory.
Prime yields across most Sydney and Melbourne office markets have reached new benchmarks.
The spread between yield and the risk-free rate has compressed, but is at a level normally associated with above trend rental growth.
Office transaction volumes are expected to be 10% to 20% lower in 2019. A high proportion of core assets have traded, while corporate activity will likely be concentrated in small to mid-cap REITs. However, the emerging development pipeline in some office markets will generate fund-through or take out opportunities for core capital sources.
Offshore capital sources will remain active in the Australian office sector in 2019. Japanese investors are becoming more active cross-border investors and we expect that Australia’s long-term economic growth potential, transparency and low volatility of returns will make Australia an attractive destination for Japanese capital sources. These investments may be either direct asset acquisition or through funds as Japanese investors value local manager experience and access to product.