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Prime rents up 27% in sought after St Kilda Road office market

Property Markets / Outlook

Australia

Mar 25 2019

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St Kilda Road office rents have grown nearly 50 per cent over the past seven years and a staggering 27 per cent in the past 12 months (to Dec) reflecting both the historically tight CBD market and the recent withdrawal of St Kilda Rd stock, according to CBRE research.

Senior research analyst, Aiden Bresolin, said prime net effective rents increased 27 per cent from $273psm in December 2017 to $347psm in December 2018, with further growth expected over the next few years as high rents in the CBD market push tenants into fringe locations.   

He said St Kilda Road, with a seven-year annual growth rate of 5.4 per cent, also outperformed the similarly sized markets of Macquarie Park (3.4 per cent), Parramatta (5.2 per cent), and Southbank (3.8 per cent).

According to CBRE Director, Mark Wizel, St Kilda Road has seen vacancy rates trend down over the last few years as the CBD continues to tighten up and tenants look to the fringes for more affordable options.

He said the resultantstrong rental growth had not been lost on landlords looking to capitalise, with properties once earmarked for residential and/or hotel uses looking increasingly likely to return to office use. 

``What we saw over 2015, 2016 and into 2017 was frenetic demand for apartment space to the degree that we saw office space withdrawn from the market. We are now seeing the reverse and that is both a function of the extremely tight CBD office market and the downturn in the residential market.

``Combined with a third factor – the withdrawal of office stock – we now have some of the strongest net effective, non-CBD, rental growth in the country,’’ Mr Wizel said.

CBRE Director Office Services, Anthony Park, said the recently increased retail amenity along St Kilda Road, and the new Domain underground station planned for the corner of Domain Road, were additional market drivers adding to the desirability of the location for office tenants.

``The real game changer is the metro tunnel system with construction well underway. Occupiers are taking a long term view knowing they will, in the medium term, share the benefit of a train station servicing St Kilda Road as well as a much improved retail offering,’’ Mr Park said. 

He said the tightness of the market was also reflected in the minimal number of recent transactions with only three properties sold in 2018 including 541 St Kilda Road, which sold for $64 million, 509 St Kilda Road ($163m), and 464 St Kilda Road ($95.38m).

``There are another tworecently listed properties at 424-426 and 420 St Kilda Rd, which will be a real test of the back-to-office market,’’ Mr Park said.

The 424-426 St Kilda Road property, known as Illoura House, comprises a net lettable area of 12,659 square metres over six levels on a 4645 square metre site with basement parking for 144 cars.

The site has three street frontages and an approved permit for an 18 level building – nearly three times the current height – with 163 apartments and 176 hotel rooms, including a commitment from Marriott Hotels.  The vendor has secured agreement with the building’s tenants – the building is circa 85 per cent vacant - which will allow development, or a refurbishment, to commence almost immediately.

The refurbished, and 99 per cent leased, 420 St Kilda Road property, which is being sold on behalf of private equity firm KKR and its local partner Vantage Property Investments, comprises a 10,452 square metre office building with parking for 131 cars.

Mr Wizel, who is marketing the 424-426 St Kilda Road property with Mr Rutman and Lewis Tong, said the asset would appeal to investors who wanted to maximise the potential of the existing building, and developers/land bankers cognisant of the exceptional St Kilda Road potential.

``The property offers strong prospects for refurbishment and re-leasing of its 12,500sqm NLA as a longer term investment in an increasingly tight office market, whiledevelopers/land bankers may see the value in the current building envelope which could be significantly enhanced for a development that would take advantage of the very strong office market. 

``I have no doubt we will also see significant interest in the site from developers of hotels and mixed use projects out of Asia, especially given the interest already shown by Marriot, which had a deal in principal with the vendor to take the hotel component of the approved project,’’ Mr Wizel said.

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