Australian Office investment returns above historical benchmark
Investors navigating the Australian office investment landscape have opportunities to satisfy diverse investment mandates
The returns generated by Australian office assets in 2016 were significantly above the historical benchmark, according to a new report by global property services firm, JLL.
The Australian Office Investment Review and Outlook states that investors are now accepting that returns for core real estate will be broadly between 6.50% and 8.00%.
Investor mandates were more diverse in 2016, with a movement of capital into suburban office markets due to the positive market fundamentals. JLL recorded $5.1 billion of transactions across non-CBD office markets, equating to 37% of total office sales in 2016. Historically, suburban markets have only accounted for around 30% of transaction volumes per annum.
JLL’s Head of Office Investments – Australia, Rob Sewell said, “Investment mandates are diverse and over the first part of 2017 we have capital ready to be deployed across the risk spectrum.
“Our analysis is pointing to another good year of returns for the Australian office market after 2016 levels were above historical benchmarks. JLL’s area-weighted Total Return Index (TRI) for CBD office markets increased by 12.6% in 2016.
“We are currently in the midst of an unprecedented liquidity cycle, which is being expressed both by high levels of transaction volumes and the number of bidders on major assets.
Weighted average CBD office total return index
“Total office volumes last year were curtailed by a lack of available product. Nevertheless, 2016 still ranked as the third highest year of record for volumes at $14.46 billion. The number of under-bidders on campaigns in 2016 across geographies were at elevated levels.
“New pricing levels will stimulate vendor motivation, while liquidity creates an opportunity to divest large less liquid assets,” said Mr Sewell.
Target-to-current allocation spread
JLL’s Head of International Investments – Australia, Simon Storry said, “The Australian office sector remains a beneficiary of the great portfolio tilt to real estate and the Asia Pacific region.
“Offshore investors accounted for 42% of total office transactions in 2016 at $6.19 billion, dominated by Chinese, Singaporean and US investors. Our review of the spread between target and current allocations by offshore investors shows potential sources of capital in 2017 include South Korea, Hong Kong, Singapore and Germany,” said Mr Storry.
JLL’s Australian Head of Research, Andrew Ballantyne said investors navigating the Australian office investment landscape have opportunities to satisfy diverse mandates.
“Sydney and Melbourne can be classified as the high growth markets. Asset pricing is reflective of the strong rental growth outlook with prime net effective rents projected to rise by 34.9% in the Sydney CBD and by 18.7% in the Melbourne CBD from 2017 to 2019.”
“Brisbane and Perth offer counter-cyclical opportunities and are considered to the cheap side of fair value markets. Yield spreads to Sydney and Melbourne have widened beyond historical benchmarks and new sources of capital are exploring opportunities to gain exposure to a potential market recovery.
“Real estate investors have shown a bias for low risk assets. Adelaide and Canberra are the epitome of low risk with the volatility of returns typically lower through the cycle,” concluded Mr Ballantyne.