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Office rents to rise sharply: HTW

Property Markets / Outlook

Australia / Melbourne

Nov 05 2018

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Vacancy rates will continue to fall over 2019 as Melbourne’s office market peaks, before rising again at the end of 2020, driving potentially sharp effective rental growth over the next two years as incentives decline, according to independent advisor and valuer Herron Todd White’s latest report.
 
HTW Director of Office Valuation, Jason Stevens, said the high net absorption rate of prime Melbourne CBD office stock would continue to place Melbourne CBD below Sydney at the lowest vacancy rate of all Australia’s CBDs.
 
``There is limited new prime office supply due for completion over the next two years before the large deluge of supply forecast for 2020 is due to come online, so we see vacancy continuing to tighten over 2018 and into 2019, before rising again in 2020, and that is going to continue to drive up rental levels,’’ Mr Stevens said.
 
According to the PCA’s latest Office Market Report, Melbourne CBD’s overall vacancy rate has reduced to 3.6 per cent, while the North-Eastern and Eastern Cores have the lowest vacancy rates at 0.6 per cent and 1.4 per cent respectively. Vacancy rates were the highest in the Western and Spencer precincts reflecting 6.7 per cent and 4.3 per cent respectively.
 
Mr Stevens said markets to watch were those in inner/city fringe suburbs where older industrial sites were being land-banked as future office and/or apartment and mixed-use conversions.
``We have already seen very strong demand for commercial development sites across the Cremorne and Richmond area which has driven strong capital growth over the past two years and we are going to see more of that as our population grows and businesses clamour for fringe leasing opportunities.
``Local agents are reporting a shortage of space and strong growth in face rents with net rents now in excess of $500 per square metre net for new boutique office space in what has become a new technology hub in Cremorne and Richmond with minimal incentives offered.  
``Those factors – high leasing demand, strong underlying land values, and robust population growth - seem likely to continue to drive a very active investment and development market which is changing the shape of our inner suburbs,’’ Mr Stevens said.  
He said recent development site sales in Cremorne had reflected land rates of well above $10,000 per square metre including 102-106 Stephenson Street which sold for $7.1 million representing a land rate of $12,909 per square metre, while strong recent sales results included: 
 
210 Kings Way, a five storey office building, sold for $32.01 million in October on a tight passing yield of 4.78 per cent. The island site is zoned Mixed Use and offers redevelopment upside. 
105 York Street, another five-storey office building, sold for $49 million in September to a private investor, reflecting a capital value rate of $9,606 per square metre and a passing yield of 5.35 per cent. 
17-21 Harcourt Parade, Cremorne, an eight storey office building expected to be completed in 2020,  sold off-market to AXA Investment Managers in August for $100.5 million. MYOB has pre-committed to over 8,800 square metres of net lettable area for an initial term of ten years. The sale reflected a record capital value rate of $10,404 per square metre and a yield of 5.4 per cent.
 
Mr Stevens said while it seemed unlikely that interest rates would rise in the short term to put a break on investment activity, a tightening in lending in the commercial space could mirror the impact on the residential market potentially reducing buyer demand which may correspond in a reduction in commercial property values.

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