Yields fall as office blocks prove popular investment location

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Strong demand for Australian office real estate has helped push yields down to multi-year lows in numerous capital cities over the December quarter.

According to the latest Australia Office MarketView report from CBRE, 2015 saw $14.9 billion invested in Australian office real estate, well above the 10-year average of $9 billion.

That level of interest has resulted in yields from office blocks compressing to an Australian-wide mark of 6.1%, with Melbourne and Sydney recording significant declines.

According to the report, yields from office blocks in Melbourne fell by 0.32% to a record low of 5.9% over the quarter.

Yields from office blocks have not been that low in the Victorian capital since 2007.

Over the same period, yields fell to 5.4% in Sydney, which is only 0.2% above the record low the city recorded in 2007.

According to CBRE, yields won’t see any drastic improvement in the near future.

“There are still several major transactions in due diligence or in negotiation which are expected to settle in quarter one this year,” CBRE Associate director research Felice Spark said.

“We are forecasting further yield compression in the first quarter of 2016, but then expect to see stabilisation, before some modest decompression later in the year,” Spark said.

Despite the reduction in yields, CBRE are predicting interest in Australian office real estate will continue from investors in a number of global locations, including Asia, North America, the Middle East and the Euro Zone.

“With capital continuing to diversify and move to safer havens, the expectation is that Sydney and Melbourne will continue to attract investor interest,” CBRE executive managing director capital markets Mark Granter said.

“The foreign capital, particularly from Korea will also look at other markets such as Brisbane and Canberra, where there is longer term leased properties available,” Granter said.

The strong level of interest in the Australian office market means 2016 will likely see a marked increase in supply levels in the coming year.

“2016 will see a continuation of high supply additions, resulting in the national vacancy rate peaking, on our forecasts, at 11.5% at the end of the year,” Spark said.

“However all markets are expected to record positive absorption this year and vacancy rates will begin to track down as new supply wanes.”

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