A spike in activity in Melbourne's CBD fringe office market has seen a record $1.58 billion in transactions over the year to September, as yields firm by up to 50 basis points across the broader office sector, Savills Australia research says.
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The value of transactions, up a massive 126 per cent on the previous year in Docklands, St Kilda Road and Southbank, was more than double the five-year average of $762 million for the fringe market.
Relatively high office vacancy rates - now 9.4 per cent according to Savills - have not deterred a rush of investment. Commercial office transactions across Melbourne were up by 54 per cent, to $4.45 billion over the same period, Victorian head of research Glenn Lampard said.
Trusts were the key player in the CBD, accounting for 40 per cent of purchases, while funds lead on the fringe with 74 per cent and private Investors took 42 per cent of suburban market stock.
Savills' Victorian managing director Dominic Long said the figures reflected strong demand from local and foreign investors. "CBD sales now average more than $1.7 billion over the last three years and more than 87 per cent over the $915 million, 10-year average."
A widely anticipated leasing market rebound over the next 12 to 18 months would underpin demand.
"The recent strong rise in industrial market leasing – a traditional bellwether for the economy generally – augurs well for growth across all property markets," Mr Long said.
Knight Frank research director Richard Jenkins said rising tenant demand would see Southbank's office vacancy fall from its current 6.8 per cent to 6.4 per cent by January 2015.
St Kilda Road's vacancy was also set to drop from 11 per cent to 10.6 per cent over the same period, he said.
Mr Jenkins said that over the past 12 months, core market yields for St Kilda Road assets had compressed by 63 points to range between 7.25 and 7.75 per cent. Southbank office core market yields compressed by 25 basis points to between 7 and 7.5 per cent.
Mr Jenkins said, although average prime St Kilda Road and Southbank yields now stand lower than their 10-year average levels, the spread to prime CBD office assets remains higher than the long-term average, implying that further yield compression was possible.
Mr Lampard said yields for prime office assets had firmed at the lower end of the range by as much as 50 basis points. Yields generally ranged between 6.50 and 7.25 per cent for A-grade buildings, and between 7.75 and 9 per cent for secondary grade, he said.
