Despite limited transactions of office buildings over the last 12 months, particularly of the larger “trophy” investments, the market in the inner east still appears to be very healthy – sustained predominately by owner occupiers looking to shift out of the tenancy market and into their own premises. Directly related to the strength of the economy at a macro level, business investment has been remarkably resilient over the past year which has led to a more positive demand outlook for the office market.
When leasing office investments, it advisable not to lock in tenants without consideration of the possible ramifications to the capital value.
From the sales side of things, the majority of the properties offered to the market over the last 12-18 months have been assets underpinned by high underlying land values within well-regarded locations in terms of public transport and proximity to established office precincts. Yields have generally ranged between 7.0% and 8.0% for the larger buildings and sub 7.0% for the smaller, lower-value buildings (notably in the sub $5 million price bracket). Limited stock of both office investments and buildings offered with vacant possession will continue to keep yields tight. With the present level of demand for vacant possession of office accommodation, we continue to see competitive auctions and strong enquiry when buildings become available.
Our recent auction of 405 Riversdale Road, Hawthorn is a good example of such demand. The building comprised a good standard of accommodation and a total building area of 360 square metres, offered with vacant possession. Interestingly, given the limited availability of office (whether vacant or leased), there was a strong level of interest from investors. We had a very strong marketing campaign with a large number of inspections conducted. We found a strong auction attendance culminating a total of four bidders fighting it out for the property - pushing the price to the eventual result of $1,725,000 (reflecting over $4,750 per square metre of building area). Given its excellent location and smaller size, together with its position at an affordable price point for owner occupiers, we achieved a result consistent, if not higher, than we would have achieved at the height of the market in 2007.
The growing confidence amongst investors in addition to recent sales evidence, indicate that yields have now stabilised, particularly for prime assets. There are now a greater number of owner occupiers in the marketplace and we expect this trend to continue. As the small to medium enterprises and established businesses continue to gain confidence in their operations and future growth projections, we will see many of these opt out of the tenancy market and target vacant offices or those with short term leases in place. While it is anticipated we will evidence many buying now as a good opportunity to capitalise on the price reductions from the late 2007 peak.