This article is from the Australian Property Journal archive
Melbourne’s CBD office market is set to lead the investment market in 2006, according to Jones Lang LaSalle.
According to JLL, the South East office market will come a close second and the industrial markets again performing strongly.
JLL research Victorian manager Darren Krakowiak said the difference between the top and bottom performers, will not be that great in terms of final outcomes but there is a clear hierarchy of expectations for the key sectors.
He added the outlook provides a strong guide for the investment potential of the sectors.
JLL forecasts that over the next 12 months, the retail market will continue to remain flat and the St Kilda Rd office market will again lag the field despite putting in some recent strong gains. However, JLL forecast some potential upside in the CBD fringe location.
“The CBD office market is the rising star with huge upside potential following the digestions of massive amounts of office space and relatively low vacancy rates. With demand several years ahead of expectation investors are starting to move to catch the cyclical upswing already.
“The South East office market continued to offer a secure outlook while the retail market, one of the most hotly contested investment sectors over the past 4-5 years, had peaked and was unlikely to offer any upside until consumption grew in line with the new supply of space coming into the market,” Krakowiak said.
According to Krakowiak, the industrial market has remained one of the hottest sector for the third year in a row and with yields at record lows, investors will need to look in other sectors for growth in the short to medium term.
“The St Kilda Rd office market offers the most risk and perhaps the most upside. Demand has been positive recently and the strip is reinventing itself slowly as a major destination for start-up and small businesses with a strong rump of the major tenancies still in place.
“The lack of new stock is positive for the market but the upside there may come from demand spilling out of the CBD and South East into a ‘halfway’ location that offers many of the positives of both markets without some of the perceived downsides.” Krakowiak concluded.
JLL’s Waverley director Justin Clarkson said the South Eastern suburban office market is close to its peak after 10 years of relentless growth.
He added that the result is that a number of investors are releasing stock into the market to capitalise upon the demand.
“Investors are finally getting the stock they require as investors start to release property, some of its opportunistic and other investment grade.
“Jones Lang LaSalle Research found investment activity remained steady in the second half of 2005 with five sales with a combined value of $44.7 million being recorded,” Clarkson said.
However more than $50 million of office investments have come into the market in 2006 including:
852-858 Glenferrie Rd, Hawthorn
677 Eaglemont Drive, Eaglemont
615 Dandenong Rd, Armadale
4-10 Jamieson St, Cheltenham
19-23 Prospect St, Box Hill
In addition, a building 303 Burwood Rd in East Burwood and another office building at 888 Doncaster Road in Doncaster remain unsold after coming into the market in 2005.
Clarkson said a further $50 million of property is on offer off-market with a major asset under due diligence that will be one of the largest sales in the market for some time.
“Demand still outweighs supply however and despite the activity in the second half of 2005 average prime yields firmed by 25 basis points at both upper and lower ends to range from 7.25% to 8. 75%.
“At the same time Jones Lang LaSalle Research reported secondary yields firmed by 25 basis points at the upper ends and 50 basis points at the lower ends to range between 7.25% and 9.5%,” he added.
Clarkson said the sale of 1183 Toorak Rd Camberwell to Trinity Funds Management for $9.75 million at a passing yield of 7% signalled that buyers are still very confident in the future of the SE market.
He said underlying tenant demand in the SE market remained strong despite a flood of new office buildings coming into the market in 2006 that sent the vacancy rate up slightly from 7.5% to 8.0% for the second half of 2005.
“This rate is set to come under further pressure as twelve new projects totalling 55,300 sqm are under construction with a current pre-commitment level of 39%.
“In light of the demand and counter-balancing strong supply, rental growth was modest in the July-December period of 2005 with increases of 1% and 2% being recorded for prime ($268 per sqm) and secondary ($225 per sqm) stock respectively.
“Everything is place for continued success in the SE with the stock coming into the market representing a mix of investment grade and value add properties with various levels of vacancies,” he added.
Clarkson said over time the private investors, syndicates and unlisted trusts that are supporting the market may see yields begin to slip back a little as more stock comes into the market but as long the economy remains strong there are few grey clouds.
By Adam Parsons
The Jones Lang LaSalle Research market expectations for 2006.
Melbourne CBD Office
Despite strong levels of construction set to continue in 2006, the vacancy rate will not blow out due to solid tenant demand and the withdrawal of some buildings for significant refurbishments. This will provide further impetus to prime rents, which will have another strong year after growing by 8.5% on a net effective basis in 2005. Yields have the potential to firm further as investors upgrade short to medium term prospects for the Melbourne market.
St Kilda Road Office
While net absorption is expected to be subdued, a lack of new stock entering the market (and, indeed, some withdrawals) will result in the vacancy rate falling significantly over 2006. However, due to some lingering concerns regarding the medium term outlook for St Kilda Road, achievable rental growth is expected to be only moderate while yields are expected to remain close to their current level.
South East Suburbs Office
2005 saw the South East suburban office market record its highest level of net absorption and new supply completions on record and we expect 2006 to be another strong year for tenant demand and new supply. The net effect on the market will be higher vacancy level, however it is not expected to be a dramatic increase. In fact, the market is expected to record its fourth straight year of net effective rental growth in spite of the vacancy increasing for the first time in as many years. In addition, even though the vacancy rate is expected to increase yields are also expected to firm in 2006 due a strong overall outlook for the market.
Melbourne Industrial New supply will continue to influence the performance of the Melbourne market in 2006, with new additions expected to be particularly strong in Melbourne’s northern corridor. Strong competition amongst developers and trusts to secure pre-leases is expected to result in rental growth being only moderate in 2006. However, the rental outlook is expected to improve in the medium term as land supply dries up and the rental market responds to higher land prices and construction costs. As a result, industrial property will continue to remain in favour with investors and yields are expected to firm slightly.
Melbourne Retail The supply pipeline remains strong and with retail sales growth expected to be unspectacular in 2006, rental growth is expected to grow at similar levels to those recorded in 2005 over the next 12 months. In particular, centres in inferior locations or with a poor tenant mix are likely to face weaker rental growth prospects. We believe that yield compression for retail assets has peaked, or is close to its peak, in the current cycle. However, as retail sales growth remains positive and available stock is limited, we are not expecting any softening in yields either.