Melbourne Office

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The owners of three adjoining Melbourne commercial buildings have opted to take them to the market together following a strong 2019 Melbourne office market.
They have reported $75 million hopes.
They recently received a major planning permit across the combined site which allows for a hotel and mixed-use development project.
The property, comprising around 30,000 sqm of buildable area, is expected to attract the attention of larger domestic and international development groups.
CBRE Melbourne Middle Markets agents Mark Wizel, Josh Rutman, Lewis Tong and Scott Orchard are offering the properties either in one line or separately. 
Hotelier Aziz “Ozzie” Kheir, Prebuilt founder Phil Merton and developer Frank Palazzo did have hotel plans.
The largest of the asset is the former Sands &amp; McDougall building at 355 Spencer Street (pictured above). 
The historic 7,363sqm corner office building once housed Melbourne’s leading printing and publishing firm for well over a century.
Sands &amp; McDougall was best known for its annual Directory of Melbourne publication – a near encyclopaedic book that captured the identity and address of every business in Melbourne – which ran from 1862 to 1974. The company’s main printing house was located within the building and the proud horse logo still adorns the façade. 
Mark Wizel said the repositioning and rejuvenation of older character buildings has become extremely lucrative in recent years, and this asset is perfectly placed to capture unsatisfied tenant demand for unique, but well-located, accommodation.
“With office vacancy at record lows and the residential market also showing strong signs of recovery, there’s little wonder why investors are showing such strong appetite for buildings in and around the Melbourne CBD,” Wizel added.
In a similar transaction of a heritage building in late 2019, 22 William Street, known as Swann House, sold for $52,000,000 which will see the buyer embark on a refurbishment program, targeting rents of over $700/sqm.
 
 
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Three adjoining Melbourne office buildings to attract investors and occupiers

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SPONSORED POST
Melbourne is the most sought after office real estate location in Australia, with unprecedented local and offshore appetite for Melbourne CBD office assets continuing. Part of what is contributing to this trend is the overall cost of capital. With a strong chance of further interest rate cuts in 2019, pressure is building on banks to start freeing up credit. Another major factor is Melbourne’s anticipated rental growth. 
Rents are increasing in Melbourne faster than anywhere in Australia, particularly in the Melbourne CBD. And while investors are naturally attracted to longer leases at lower rents, Melbourne’s market is so strong that we’re seeing an equal amount of rental growth and security with short-term leases at higher rents.  
The trend and history of Melbourne’s rental growth 
There was a time in the mid-2000s when the Melbourne office market was ‘held back’ because of major developments such as Docklands. Since then, to say that Melbourne’s office space has recovered would be somewhat of an understatement.  
Melbourne’s total office vacancy now sits at a record low of 3.3% (including Docklands which now sits at &lt;1%), down from a high of 10% in mid-2004. 
More recently, nearly all of the additional 300,000sq m of CBD Prime office space has be pre-committed. These are developments such as 80 Collins St (South Tower), Collins Arch, Olderfleet, 405 Bourke St, 150 Lonsdale St and Flinders Gate. As further proof of Melbourne’s outperformance, a significant amount of the backfill of these major pre-commit deals have been leased. 
What the fringe says about the city
Aside from low vacancy and pre-committed leases, probably the most telling rental growth factor is the performance of properties in Melbourne’s city fringe when compared to properties in the CBD. 
Traditionally, rents within city fringe areas are cheaper than rents within the CBD, so that when fringe rents are high, we know that CBD rents are even higher. 
There are major pre-commit deals currently being leased at approximately $600/sq m net in areas such as Richmond, Cremorne and South Yarra. ‘A’ Grade CBD rents are currently hovering around sub-$600/sq m net and even some Premium Grade passing rental profiles are reflecting rents at similar levels. Most of the recent Premium Grade deals are pre-commit leases. These deals usually reflect a discount to the sitting market, so there is significant room for growth in the CBD in the short to medium term.
While the attractiveness of long term leases may not be going anywhere (particularly amid current and anticipated interest rate cuts), there’s now a significant strength in short-term options. Demand for CBD office assets with the ability to capture rental growth in the short to medium term (i.e. short WALE), will continue to be on the radar of local and offshore investors. 
Essentially the Melbourne CBD market covers both ‘cash-on-cash’ or ‘running’ yield buyers, as well as a buyer seeking a ‘total return’, whose basic benchmark metric is an internal rate of return (IRR). 
Much of this is predicated on forecasted rental growth. Melbourne’s story for most investors is extremely positive, even for assets with high capital expenditure.  Buyers in this space, generally of a B-Grade nature, are backing rental growth to offset the capex spend, as well as B-Grade assets’ rental profiles reflecting sub-$400/sq m net in the Melbourne CBD.
The investment story bodes well for Melbourne in the short and long term, which is reflective of current transaction volumes, which are at an all-time low. Those that own Melbourne CBD assets wish to capture the growth and those that are looking to purchase have a very strong reason to invest. 
Savills is a leading global real estate service provider offering the full spectrum of services from strategic advice to managing assets and projects and transacting deals. James Girvan is a Director within the Savills Capital Transactions team. To learn more about Savills, visit <a href="http://www.savills.com.au/">savills.com.au</a>.
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Why it’s the right time to invest in the Melbourne office market 

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The Melbourne office market vacancy rates, in particular in the Melbourne CBD, city fringe and inner east, are lower than the long-term average vacancy levels and are anticipated to further decline in the second half of 2019, according to the latest Commercial Market report from Herron Todd White.
The Melbourne CBD’s overall office vacancy rate was at 3.2% in January 2019, the lowest of all of Australia’s CBDs. according to the Property Council of Australia’s Office Market Report. 
According to HTW's property valuation reporters, there is limited new supply and available stock in the market until 2020. 
The robust leasing market is also being fuelled by healthy tenant demand driving strong rental growth in both face and effective levels.
Due to the rise in CBD rentals, the city fringe precinct continues to gain popularity from the creative, technology and professional services sectors.
Tenant demand is also strong in the inner east markets, particularly in highly soughtafter suburbs such as Richmond, Cremorne and Hawthorn. The inner east has a vacancy rate of 3.58%, the lowest amongst all of the metro precincts in Melbourne.
The June report stated, "It is expected that rental growth will continue for the remainder of 2019 in these precincts for well-located, good quality stock. Sales demand is particularly strong for well-located, land-rich investment assets."
"A circa 1990 double storey office building at 79-83 High Street, Kew (pictured in title) sold off-market ahead of the launch of an EOI campaign for $19 million in April 2019, reflecting a passing yield of approximately 6.2%. The property comprised 19 strata units with a total lettable area of approximately 3,361 square metres situated on a 3,760 square metre Commercial 1 zoned land allotment."
"The building had 10% vacancy and was sold to fund manager, Terraplex, with intentions to refurbish the building and potentially add extra floor space," they noted.
In the outer suburban market, the sale at 347-351 Burwood Highway, Forest Hill represents the largest metropolitan office transaction this year.
The property was sold to an adjoining owner, a Melbourne based developer, for $45.85 million in April 2019.
The property is situated opposite the Tally Ho Business Park and comprises a 2.62 hectare Commercial 1 zoned allotment improved with two office buildings with a combined net lettable area of approximately 10,692 square metres.
The property is approximately 70% leased to a variety of tenants including NEC, Bolton Clarke and Hamilton Morello.
The HTW valuers said, "we highlight that the purchaser elected to purchase the property as is without a 30% rental guarantee from the vendor and without deduction of outstanding incentives. The property has a WALE (by income) of 3.4 years and a reported reversionary yield of approximately 7.32%."
"The relatively low yield for an asset of this nature with sizeable leasing risk demonstrates the confidence buyers currently have in the Melbourne metropolitan office market."
"Due to the slowdown in the residential market and tightening lending criteria, demand for development sites within the inner suburban region has declined somewhat, however we are aware of ongoing, albeit subdued demand from developers seeking to secure well located sites to establish mixed use developments within close proximity of neighbouring retail strips, amenities and public transport."
"It is uncertain when residential market conditions will begin to recover and purchasers are cautious that any future downturn in economic activity may lead to a reduction in demand and market value, however we note that demand for commercial development sites, particularly sites with holding income, is strong in inner city areas such as Richmond, Cremorne and South Melbourne where developers are intending to deliver commercial office projects instead of apartment projects in the current market to capture the strong office leasing and sales conditions," they concluded.
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Melbourne CBD office vacancy rate lowest in Australia: HTW Commercial

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SPONSORED POST
The Melbourne CBD recorded the greatest yield compression throughout the past three years across CBD office markets globally, as reported by Savills latest Impacts report. 
In Impacts, Savills global thought-leadership programme, Savills explores the link between office yields and borrowing, and concludes that the relationship has become more tenuous as investors’ profiles have changed and fewer investments have been predicated on finance from bank borrowing. 
According to Savills, a rise in interest rates in any domain (which is looking increasingly improbable) is unlikely to result in a corresponding rise in prime office yields so they are likely to remain stable or continue to fall in many markets. 
Looking at the level of yield compression across key CBD markets globally, Melbourne led the charge, with prime yields falling 174 basis point since 2015, followed by Beijing (-132 basis points) and Berlin (-120 basis points). 
Savills Australia’s CEO, Paul Craig, said that while Australian cities were still off the 3.0 percent mark hit by other CBD markets worldwide, “It would be prudent to assume that yields Down Under will fall in a similar trend in the next five years”. 
“This is even more so the case given the Melbourne CBD’s status as a regional gateway city and the Sydney CBD’s status as a global gateway city,” he said.
CBD prime office market yields are now sub-3.0 percent in Hong Kong (2.43 percent), Frankfurt (2.9 percent), Tokyo (2.9 percent) and Berlin (2.9 percent), in a reflection of the new benchmarks being set globally. Savills report forecasts that the Paris (3.0 percent) and Amsterdam (3.5 percent) prime CBD office markets could see market yields harden to under 3.0 percent by the end of 2019.
“Throughout the past three years, we have seen growing investor demand from both foreign and domestic investors drive yields down to record low levels,” Savills Australia’s Director for <a href="https://www.savills.com.au/services-and-sectors/sales-and-investment/capital-transactions.aspx" target="_blank">Capital Transactions</a> in Victoria, James Girvan, said.
“Investors are drawn to the Victorian capital, not only because of strong demand drivers and nation-leading economic indicators.
“The risk-adjusted return for Melbourne CBD remains among the highest recorded across all office markets globally (according to latest available data from the MSCI IPD).”
Positively, as a result of record low interest rates, and thus record low long-term bond yields, the yield premium throughout the 10-year bond rate remained elevated at 305 basis points, according to Savills data in March 2019.
“We are seeing more and more investors, both domestically and internationally, recognise the investment potential in Australia, which will likely drive yields further down, particularly with interest rates likely to remain low in the short to medium term,” Savills Australia’s Director for <a href="https://www.savills.com.au/research/australian-research.aspx" target="_blank">Research &amp; Consultancy</a>, Shrabastee Mallik, said.
“We are not only seeing our peers abandoning tightening monetary policies globally, but domestically, there is also a growing consensus that the RBA will likely bring the cash rate down further this year. 
“We are seeing swap markets pricing interest-rate cuts for the remainder of 2019, which will add more downward pressure on 10-year bond rates, keeping the yield premium elevated and in favour of commercial property.
“Based on global data, yields in Australia remain elevated, compared to comparable investment destinations, providing the impetus for foreign investors to invest in Australian office markets. 
“In the past six months, we have seen increasing foreign investor activity in recovering markets like Perth and Brisbane, as they look to capitalise on relatively higher yields.”
Savills Australia’s Director for <a href="https://www.savills.com.au/services-and-sectors/sales-and-investment/capital-transactions.aspx" target="_blank">Capital Transactions</a> in Western Australia, Nick Charlton, said the prime yield differential between Sydney and Perth was at historical highs, with an approximate 170-basis-point spread encouraging international investors to look more closely at counter-cyclical investment opportunities in the Perth CBD office market.
“Investors are confident the spreads are too wide and set to narrow in the short to medium term,” he said.
“Interest in the CBD office market has been further heightened by the prospect of net effective rental growth in prime office buildings forecast to be at 9.0 per cent per annum between now and 2021, with the lack of new stock and tightening vacancy rates, which are now at sub-5.0 percent.”
Mr Charlton went on to say that Perth was “a distinctly two-tiered market”, with the premium and upper A-grade segment behaving very differently to the lower-quality A and B Grade stock, which were seeing persistently high vacancy rates. 
“Investors see this is where the opportunity lies, finding functional, well-designed and well-located buildings that can be re-purposed to capitalise on the lack of new supply and the forecast net effective rental growth,” he said.
Click here <a href="https://www.propertyobserver.com.au/images/2019/5/1/Savills-yields.jpg" target="_blank">to enlarge</a>.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/5/1/Savills-yields.jpg" alt="">
Mat Oakley, Head of Commercial Research for UK and Europe at Savills, says: “While the link between real estate yields and base rates has become less strong, it is by no means broken. Investors who look across a multitude of asset classes, particularly those searching for long-term secure income, will reach a point where the yield on sovereign bonds becomes attractive enough to prompt them to choose them above real estate. For the foreseeable future, however, prime offices in the world’s global cities will remain attractive, with competition fierce for the best assets.”
Simon Smith, Head of Asia Research at Savills, comments: “With the threat of a US-China trade war easing and the Fed signalling that it is unlikely to raise rates at the time of writing, we have seen a resurgence in demand for prime offices in Asia-Pac after activity weakened in the latter half of 2018. 2019 is therefore unlikely to see any movement outwards in yields.” 
Savills is a leading global real estate service provider offering the full spectrum of services from strategic advice to managing assets and projects and transacting deals. To learn more about Savills, visit <a href="http://www.savills.com.au/" target="_blank">savills.com.au</a>.
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Melbourne leads CBD markets globally in yield compressions for past three years: Savills

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Construction is about to commence shortly on a new health and wellness centre at 101 Collins Street.
The commercial tower, which is managed by AXA Investment Managers – Real Assets, will be home to  two studios with sprung floors and heated ceiling panels, equipped for a range of activities including yoga, pilates, barre, meditation, HIIT and a range of cardio-based classes.
The studios will be located alongside three specialist consultation rooms offering services such as physiotherapy, osteo therapy, chiropractic’s and remedial massage. 
The wellness centre, designed by Australian architects Gray Puksand, will be for the exclusive use of 101 Collins Street tenants.
Construction of the facility is slated to commence in April, with completion expected in October 2019. 
The wellness centre is the second phase of a comprehensive strategic asset plan, said Brett Dillon, Head of Funds Management at AXA IM-Real Assets.
“For almost three decades, 101 Collins Street has held the position as Melbourne’s pre-eminent office address, but we can’t afford to be complacent,” said Dillon.
“Our team is focused on responding to evolving tenant needs, new trends in technology and innovation, so our projects will continue to set new benchmarks in the premium space market.
“Wellness offerings are an essential element of today’s modern workplace, so we are excited to announce that construction will shortly commence on this industry-leading amenity at 101 Collins Street.”
Tenants at the 57-storey 101 Collins include Herbert Smith Freehills, Allens Linklaters, Goldman Sachs, and J.P Morgan.
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