Perth CBD clears $108 million in office investment YTD

Investment volumes into the Perth CBD office market in the 12 months to March 2018 are more than three times higher than this time last year, following $108 million of major office sales (more than $5 million) since the start of January, according to Savills Australia’s latest research.

The agency has released its National Office Quarter Time report for Q1 2018, highlighting a strong $740 million of transactions in the 12 months to March 2018.

Associate Director for Research & Consultancy, Katy Dean, said the increase in investment volumes on a year-on-year basis was indicative of the cyclical trend unfolding in Perth.

“There were early signs in 2016 that the market was close to bottoming out – office vacancy was reaching its peak and the divergence between prime and secondary space was increasing,” she said.

“Iron ore prices began to rally and bond yields were at record lows, and there was also a great deal of uncertainty in the political environment, particularly in the US and Europe.

“At this time, yields were compressing as the global hunt for yield intensified – a trend which we saw nationally – and the buyer profile was predominantly institutional-based.”

Ms Dean said that between 2008 and 2016 (in the 12 months to March), fund and trust institutions on average accounted for 55 percent of acquisitions for more than $5 million in the Perth CBD.

“After the flurry of assets being traded through 2015 and early 2016, the year to March 2017 saw investment turnover fall to a five-year low at $203 million, with the state election only compounding the low level of on-market opportunities being tabled,” she said.

“Institutions had reweighted and/or redeployed capital from non-core to core or core-plus assets and this cycle was appearing to come to a close.

“The yield differential between Perth and the eastern states was close to 250 basis points, providing a value gap in terms of capital values of around $10,000 per square metre to investors.”

Savills Perth’s Managing Director, Graham Postma, identified a shift in buyer profile during that time, from institutional investment to foreign investment, with the likes of Blackstone, GIC, Far East Organization, Zone Q and, more recently, Straits and OKP Holdings, all acquiring assets in Perth.

“Foreign investors accounted for 50 percent of office investment activity (for more than $5 million) by value in the Perth CBD office market during the past three years to March 2018,” Mr Postma said.

“Throughout the past 10 years, foreign investment has averaged about 26 percent annually, suggesting a rise in cyclical strategies by foreign investors in this period.”

Ms Dean confirmed this trend, saying that foreign investors accounted for 63 percent of buying activity in the 12 months to March 2018, which was their highest proportion in the past five years, while institutional investors accounted for 37 percent, their highest share since 2014.

“Interestingly, when we look at the data for who is selling, it’s mostly institutions,” she said.

“In the year to March 2018, institutions accounted for 50 percent of the assets sold in the Perth CBD (assets more than $5 million), while foreign investors only accounted for 8.0 percent of activity as vendors.

“Institutional vendors have generally accounted for about 60 percent of asset sales annually in the Perth CBD throughout the past 10 years, while foreign investors appear to have longer holding periods, only averaging about 5.0 percent of activity as vendors.”

However, Ms Dean went on to say the price point varied when looking at the average sale price, with institutions purchasing assets at about the $110 million-plus mark on average, and foreign investors entering the market at about $60 million-plus in Perth.

“To some extent, the lower price point is indicative of the value-add or opportunistic strategies being employed by foreign investors,” she said.

“Recent examples include Zone Q’s acquisition of 55 St Georges Terrace and 182 St Georges Terrace for $43.5 million and $21.1 million respectively, and OKP Holdings first foray into Australia, with its acquisition of 6-8 Bennett Street for $43.5 million.”

Mr Postma said Perth was “Still at a sweet spot in the cycle”.

“The economy has rebounded, job numbers are up and both consumer and business confidence has improved,” he said.

“Tenant appetite for prime space is elevated and incentives have started to retract, returning net effective rental growth for the first time in five years.

“We may see more investors move up the risk curve to seek out value-add and opportunistic buys and take advantage of the shift in the cycle.”