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Sub $30m office market attracts institutional attention (and what it means for investors)

Categories: Office

There’s not a lot of high quality, well-tenanted office assets out there in Australia. It’s forced the big players to look to smaller targets.

Almost no institutional grade CBD office assets changed hands in Brisbane in 2020. The city was one of the first to resume its pre-pandemic foot traffic, but institutional investors found a hard time getting back into the commercial property market. Similar stories were seen across the country in 2020. COVID-19 played its part in reducing large-scale investors’ ability to transact on these assets, but in truth, there just aren’t that many out there with a For Sale sign.

And 2021 has seen a similar story. 

Only two major CBD office transactions have taken place in Brisbane so far this year. Meanwhile, Sydney investors are looking outside the CBD boundary for office investment. Vacancy rates are rising again in Melbourne CBD, particularly for A-grade (8.1 per cent vacancy) and B-grade (10.3 per cent vacancy) markets, causing institutional investors to invest cautiously in downtown districts. And Perth CBD, while showing huge economic success since COVID-19 and a fruitful future, has not yet seen any notable big league sales so far this calendar year. 

cbd office assets

The thing is, there is a significant weight of capital across these major office markets seeking limited investment opportunities. But while institutional grade office assets have had a slow 12 months, there has been a huge uptick in demand for sub $30 million prime office assets across the country, and not necessarily those in the CBD.

Suburban office markets in Australia are showing signs of improvement, far beyond that of the CBDs. And these markets are gaining the attention of big investment players.

We’re even seeing institutional money move away from the industrial and logistics sector, which since 2020 has experienced huge demand from investors. Singapore’s largest holder of industrial and office property is divesting some of their industrial stock on the eastern seaboard, noting “the proposed divestments are in line with the Manager’s proactive asset management strategy to improve the quality of Ascendas REIT’s Australian portfolio and optimise returns for unit holders.” 

Why small suburban office?

So, why is institutional money heading toward office assets with smaller price tags in suburban districts? 

Of course, limited supply is one factor. Another large motivator is the attractive yields and stable long-term leases underpinning many of these assets, such as national and international tenants, or those assets with government leases. 

According to Herron Todd White (HTW) in their May 2021 Month In Review report, “An outer suburban office asset in Beenleigh [QLD] with a government lease covenant and long lease tenure (circa 8.23 years remaining) achieved a strong sale price recently of $7 million and a passing yield of 5.90%. This sale highlights that tenant quality and WALE are by far the most important market considerations at the present time.

Relevance of suburban office assets

suburban office

An even larger propellant is the relevance of these office assets. 

The future relevance of office buildings in a post-COVID world has been called into question by many property pundits. With the commuting time, leasing costs, and the increased ability of white collar workers to be productive at home, there is concern that our CBDs will be a vacuum for office tenants. Many large corporations have already amended their policy to enable a large chunk of their staff to work from home. Entire CBD office buildings are being left vacant as a result. 

But in suburban districts, this simply isn’t the case.

The proximity of suburban office districts to workers’ homes is a huge drawcard for assets in those precincts. For smaller businesses, there is a need for a central base to keep company culture alive, so they continue to use a centralised business location. And this is not only for smaller businesses. Many corporations are dividing their departments into smaller teams, and sending them to work out of suburban office districts; closer to home, closer to their families.

CBD yields are tighter

Another motivator is yield, with HTW saying, “Yields have tightened by circa 50 to 75 basis points over the past 12 months for these types of assets and typically will range between 6% and 6.75% for prime assets in fringe CBD precincts, whilst yields in inner city precincts and suburban areas typically range between 6.5% and 7.5%.”

These institutional players have investors to satisfy. And CBD assets are just not cutting it for the returns these investors expect. 

What are institutional investors looking for in sub $30 million office assets? 

Prime office assets underpinned by a robust tenant, with long lease tenures. 

As for property characteristics, strong fundamentals are – as usual – whetting institutional appetites: good on-site parking, well-lit spaces with an abundance of natural light, functional building design, flexibility within the work space and diverse floor plate sizes, and close proximity to transport nodes and amenity. 

On-market opportunities for well-leased office investments are scarce across Australia. It’s high competition for the many wholesale property funds and smaller property syndicates who are now competing against institutionals for sub $30 million prime office assets. 

This is the time for investors to utilise their network and the deep relationships they’ve built with industry players. 

That’s what we did…

In June 2021, our most recent investment, Pathway 17 Unit Trust, sold out within 24 hours of opening to the general public. The prime office asset in Loganholme QLD has a 5.7 year WALE and is leased to one of the east coast’s largest residential builders. It is a fully leased A-grade building and sits parallel to two major arterial roads. 

Our investors are receiving a 5-year average cash return of 7.50%. 

So, while a supply shortage is forcing many institutional investors to suburban office, bolstering competition for dynamic commercial property firms, there are still opportunities to be found if you know the right people. 

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