THE SEARCH FOR YIELD · capital. In 2016, Colliers International Melbourne Capital Markets team has...

Australian Capital Markets | OfficeQ3 2016

Accelerating success.

Australian Capital Markets – Q3 2016 | The Search For Yield Colliers International

THE

FOR YIELDSEARCH

2 Australian Capital Markets – Q3 2016 | The Search For Yield

A secure Australian economy driving investmentThe search for yield has intensified in global markets despite tough economic conditions in 2016. In light of this, the Australian economy continues to prosper with the most recent quarter of positive GDP growth delivering Australia 100 quarters without a recession. Low unemployment, a transparent legal system, low sovereign risk, AAA credit rating and a lower AUD continue to drive offshore capital into Australian real estate. On top of these fundamentals, Australia is still offering attractive effective yields when compared to their global counterparts, which will only increase the global perception of Australia as a safe destination to deploy capital.

Monetary policy remains favourableMonetary policy since the Global Financial Crisis has been the key stimulus tool for the majority of Central Banks throughout the world. The US, U.K, Japan and Euro Zone - just to name a few - have adopted record low interest rates in an attempt to stimulate economic growth. The strength of Australia’s resources sector allowed Australia to delay dramatic rate-cutting,

The Australian office market continues to benefit from favourable domestic conditions, which is driving an increase in demand from all capital sources.

Global unease positions Australia favourably as an investment destination

and even though the current cash rate is at an Australian record low of 1.5 per cent, it is still relatively high when compared to other developed economies. The ‘lower for longer’ theme echoed around the market – along with the spread between government bonds and property yields – is expected to continue to compress yields on commercial properties.

Funds positioned wellFinancial Year reporting season yielded strong results for many A-REITS, benefiting from historically low interest rates, driving yield compression and subsequently an increase in book valuations. With cap rates potentially surpassing pre-GFC levels there are questions regarding property funds’ position should interest rates rise. However, groups have leveraged off the current monetary policy adopted by the RBA by lowering borrowing costs, reducing gearing and pushing out debt maturities. The current environment has also given funds the opportunity to review their portfolios and sell-down their non-core assets which don’t fit future objectives.

3Colliers International

Major Central Bank Rates

Long WALE demand intensifiesDemand for long WALE assets with secure ‘bond-like’ income streams is at an all-time high. The scarcity of these annuity style assets has forced the hand of Vendors nationally with a number of transactions re-rating their respective markets. Record low interest rates and government bond yields have amplified the

search for yield and security with significant weight of capital from offshore groups in particular Korean and German investors. Domestically, Charter Hall’s impending launch of their Long WALE REIT highlights Australian managers’ response to this trend, with the IPO set to be the largest in Australian real estate history.

Source: Colliers Edge

28 O’Connell St, SydneySold by Colliers International on behalf of CHUBB Insurance for

$91 million


SYDNEY

Fundamentals continue to drive the Sydney market

The Sydney market continues to perform against a backdrop of strong fundamentals and lower transaction volumes.

Demand rises as transaction volumes drop2016 appears set to see significantly lower levels of office transaction activity, as institutional owners feel the weight of capital in their existing investor bases. While Sydney’s status as the preferred destination for office capital has intensified buy-side demand, existing investors are increasingly comfortable with holding core positions at record levels of pricing. Transaction volumes for the first half of 2016 of $0.97 billion were materially lower than the $2.5 billion recorded in the first half of 2015. With the majority of office A-REITs trading at

Sydney CBD Net Effective Rents vs YoY Growth


premiums to NTA and wholesale funds finding strong demand in equity markets, Sydney’s core status appears to be holding back the deep pools of capital queuing to get direct exposure.

Leasing market imbalanceCompetition in Sydney’s B grade leasing market continues to intensify, driven by a wave of imminent stock withdrawal and increasing tenant requirements. B grade rental growth has exceeded all other grades during 2016, posting a 26.9 per cent increase for the year from June 2015, with B grade vacancy forecast to drop below 2 per cent. The bullish

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55 Clarence Street, Sydney Currently being marketed for sale

by Colliers International on behalf of Eureka Funds Management

B grade outlook has the potential to affect the Prime part of the Sydney CBD market, as effective B grade rents begin to intersect Prime deals. Currently, a B grade deal in Sydney with an incentive of 15 per cent may prove more expensive on an effective basis than a Premium deal with a 35 per cent incentive.

National portfolio sales provide investment volumeWhile transaction volumes in Sydney have trended lower, the momentum of national portfolio sales has continued throughout 2016. The sale of Denison Funds Management’s portfolio of 14 assets to Propertylink in August for $174.35 million provided another example of the appetite of investors seeking immediate scale and diversification. The typically secondary nature of diversified national portfolios provides a significant yield premium to core assets, creating an attractive yield arbitrage. The market looks set to be tested again before the end of 2016, with Blackstone announcing the sale of their 10 asset non-core office portfolio with hopes for in excess of $700 million.


MELBOURNE

Strong depth in buy-side capital underpins Melbourne investment market Greatest ever depth of buy-side capital, with continued growth of capital from offshore.

Melbourne remains a desirable destination for offshore capitalMelbourne’s status as Australia’s second largest office market and a gateway city continues to fuel buy-side demand. Assets with the best combination of location and building quality are drawing the greatest demand from offshore capital. In 2016, Colliers International Melbourne Capital Markets team has received over $10 billion in bids for Melbourne office towers. Offshore parties accounted for 66 per cent of the total bids. More recently, all bids received for the 380 La Trobe Street and Twenty8 Freshwater Place sale campaigns were

from offshore parties with the most prevalent origin of offshore capital emanating from USA and Singapore. Demand from offshore groups is expected to deepen further in the new year, particularly as a result of Brexit which has increased weightings to and focus on Asia Pacific, in which Melbourne is a stand-out market.

Offshore groups trading out of assets following strong period of acquisitionFollowing a strong period of acquisition from 2010 to 2015, offshore investors are capitalising on strong current market conditions and divesting out of their

Total Volume of all Bids - $11.82 BillionTotal Volume of Offshore Bids - $7.86 Billion

% Volume ($) of bids by origin of capital Colliers International 2016 Melbourne campaigns



investments. In 2013, 380 La Trobe Street was purchased by Invesco Real Estate for $113.6 million and following significant capital upgrades and new recent leasing deals boosting the WALE to 9 years, the property sold for $176.5 million. Other examples of offshore groups trading in and out of assets more recently include Deka (South Wharf), SachsenFonds (161 Collins Street & 75 Dorcas Street), Deutsche Bank (575 Bourke Street) and LaSalle Investment Management (55 King Street).

Lack of on market core CBD office opportunities in 2016 will drive investor demand moving forwardOnly three major office investments have traded thus far in the Melbourne CBD in 2016. The lack of on market core CBD office opportunities has seen investors turn their attention to quality large scale assets outside the traditional CBD grid. A total of approximately $1.2 billion in total sales volume has occurred or is currently being marketed in Southbank

alone with the sales of 75 Dorcas Street, Twenty8 Freshwater Place, Southgate Complex and pending sale of 12 Riverside Quay. Currently, in Melbourne there is approximately $900 million worth of property either being marketed or in due diligence. Although, the strongest pricing metrics seen in Melbourne were reflected from Blackstone’s acquisition of a 50 per cent share in Southern Cross Towers last year, Colliers International anticipates market yields to breach 5 per cent over the course of the next 6-12 months.

380 La Trobe Street, Melbourne

Sold by Colliers International on behalf of Invesco Real Estate

for $176.5 million.

5 Queens Road, Melbourne

Currently being marketed by Colliers

International on behalf of Charter Hall Office

Trust


BRISBANE

Brisbane’s evolution and value driving investment

Yield arbitrage attractive to the greatest ever depth of buy-side capital, particularly from offshore.

The ‘Flight to Quality’Practical completions of 480 Queen Street, 180 Ann Street and 1 William Street has added 186,684m²** or 14.9 per cent* to the prime office stock in Brisbane’s CBD skyline, resulting in a vacancy uplift to a record high 16.9 per cent*. Lease tails from tenants relocating to 480 Queen Street has increased the CBD’s sub-lease vacancy to a historically high 30.1 per cent* of total prime vacancy. Premium grade sub-lease space is being offered at attractive rental terms which has resulted in many tenants upgrading to Brisbane’s premium grade buildings from secondary buildings. Relief for the secondary market will come from

85,058m²** of withdrawals resulting from the Queens Wharf Redevelopment and student accommodation projects. Recently announced infrastructure concessions for the untested vertical aged care use will provide further adaptive re-use opportunities which could lead to some further withdrawals.

*Source – PCA (Jul 2016)

**Source: Colliers Edge

Brisbane’s Two Speed MarketRecord high vacancy rates in Brisbane has resulted in a two-tiered leasing and capital market, as tenants and owners continue to be focused on the prime end of the market. However, opportunities

505 St Paul’s Terrace, Fortitude ValleyMarketed by Colliers International and in exclusive Due Diligence on behalf of ISPT



316 Adelaide Street, BrisbaneCurrently being marketed by

Colliers International on behalf of MRL Investments

Brisbane CBD’s changing landscapeBrisbane’s pre-eminent commercial precinct the ‘Golden Triangle’ has been the CBD’s prime business address for decades. With the recent completion of 480 Queen Street and Dexus’ plans for Eagle Street Pier and surrounding land holdings within the Golden Triangle, this precinct will maintain its status. However, recent activity has given a new focus towards the George Street end of the CBD as underutilised areas become redeveloped. The George Street evolution consists of $6 billion worth of investment from four projects, the largest being the $3 billion Queens Wharf Integrated Resort and Casino Precinct. Buildings along and near George Street will capitalise further from proposed infrastructure projects including the $1.54 billion City Council Brisbane Metro Subway System and Queensland State Government’s $5.4 billion Cross River Rail project.

Brisbane CBD Vacancy By Building Age

will emerge for buyers willing to go up the risk curve and make counter cyclical plays. This year in the Brisbane CBD, we have seen buildings with significant vacancy transact at average initial yields of 9.4 per cent and capital values of $2,969/m². In comparison, the only prime grade transaction of 300 Queen Street sold at an initial yield of 7.04 per cent and capital value of $9,709/m². This illustrates the lack of prime stock available in the Brisbane market and the attractive yield arbitrage on offer - when compared to the eastern seaboard gateway cities of Sydney and Melbourne - which is fuelling competition and driving down cap rates.

Office Capital Markets expertsAustralia

John MarascoManaging Director +61 412 211 [email protected]

Nick RathgeberNational Director +61 413 420 [email protected]

Michael LongSenior Analyst +61 433 195 [email protected]

Leigh MelbourneNational Director +61 413 253 [email protected]

Melbourne

Don MackenzieNational Director +61 409 890 [email protected]

Jonathan WilliamsExecutive +61 401 620 [email protected]

Jason LynchNational Director +61 404 092 [email protected]

Tom BarrNational Director +61 405 144 [email protected]

Brisbane

Tim MuttonNational Director +61 421 590 [email protected]

Ian ThomasNational Director +61 401 715 [email protected]

Ian MickleDirector +61 434 659 [email protected]

CanberraAdelaide Perth

SydneyAdam WoodwardNational Director +61 414 568 [email protected]

Tom GreenAssociate Director +61 439 701 [email protected]

James BarberNational Director +61 419 429 [email protected]

James GirvanDirector +61 416 138 [email protected]

Vince KernahanNational Director +61 438 262 [email protected]

Australian Capital Markets – Q3 2016 | The Search For Yield Colliers International

Jon ChomleyNational Director +61 412 219 [email protected]

THE SEARCH FOR YIELD · capital. In 2016, Colliers International Melbourne Capital Markets team has...

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