Fringe CBD vs CBD yields show attractive differential

More attractive yields and a lack of CBD properties for sale are driving strong investment sales across Australia’s leading CBD fringe office markets, according to Savills research.

The research found office sales in the Brisbane and Melbourne fringe office markets and Sydney’s North Shore were up $769 million in 12 months and more than $900 million on the five year average.

The $2.12 billion spent on office property in the North Shore was up 25 percent on the long term average of $1.7 billion, Melbourne’s $1.39 billion was up 31 percent and Brisbane’s $846 million up 22 percent.

Yields averaged 6.59 percent across the three fringe markets compared with an average 5.96 percent in CBD markets, with the largest disparity being the 88 basis points differential in Melbourne between CBD (5.75%) and CBD fringe (6.63%) yields, followed closely by the 87.5 basis points difference in the North Shore market. Brisbane showed a differential of 13 basis points.

Foreign investors were key market drivers purchasing nearly 49 percent of the total $4.356 billion sold across the three city fringe markets.

View the CBD Fringe Market Investment table.

Savills Managing Director, NSW, Simon Fenn, said while yield was perhaps the key consideration, there were several other factors which were impacting investment decision making.

“I believe the main reasons for the greater interest in the fringe markets are the softer yields and the attractive arbitrage that exists between the CBD and fringe markets, along with the improving CBD leasing fundamentals following the stock withdrawals for residential development and the metro train line,” Mr Fenn said.

He said the State Government’s long awaited investment in infrastructure and development was also a factor.

State Director of CBD & Metropolitan Sales in Melbourne, Clinton Baxter, agreed tightening vacancy levels and increasing rental levels in CBDs were driving fringe market tenancy demand.

“Savvy investors are well aware of the trends in capital city markets, particularly in Melbourne and Sydney, where tightening vacancy rates are driving rental growth.

“For tenants considering a CBD location that may mean less choice and greater tenancy costs, including diminishing incentives. The result is that fringe markets are now increasingly attracting greater attention from tenants,” Mr Baxter said.

He said government spending on local infrastructure, along with inner-city population growth, were also driving tenant demand in Melbourne.

Savills National Head of Research, Tony Crabb, said all indications from Savills offices in Australia and across the globe were that both local and off-shore investor demand would deliver another year of outstanding growth in 2017.

“Perhaps the only factor that will see a fall in total spending over the next 12 months will be a shortage of properties for sale.

“The frenetic nature of CBD investment markets over the last few years has resulted in severely depleted stock levels to the point where investors are being forced to consider other office markets and other property types including retail and industrial.

“Of course that will mean ongoing pressure on yields as investors chase fewer assets and fringe CBD market properties will come under increasing scrutiny,” Mr Crabb said.