The release of Savills Office Quarter Time Q1-19 showed gains across key indicators in most office markets nationally.

According to Shrabastee Mallik, Director of Research & Consultancy at Savills Australia, “The yield compression cycle continued nationally. Whilst yields fell to record low levels in December 2018 in Sydney CBD and the fringe markets in the Harbour City, they fell further in the March quarter.

“Most positively, we finally saw investor interest in Perth drive yields lower, across both the CBD and West Perth office markets and we are already seeing significant investor interest in Perth CBD assets, as the economic resurgence of the Western state drives consumer confidence and business sentiments,” she said.

Capital value growth in Melbourne’s office markets was the most pronounced nationally.

According to James Girvan, Director of Capital Transactions at Savills Australia, investor interest in Melbourne remained strong, as a result of the capital value discount to Sydney in conjunction with strong demand drivers.

“Whereas average A Grade capital values in the Sydney CBD were recorded at circa $20,300 per square metre, comparable assets in the Melbourne CBD had average capital values of $11,300 per square metre.

“The greatest capital value growth across all CBD markets nationally was recorded in the Melbourne CBD, with average A Grade capital values increasing 13.0% in the 12 months to March 2019. Most notably, this is based on near record low transaction levels in the 12 month period to March 2019.

“Anecdotal evidence suggests increased sales volumes over the latter half of 2019 will likely provide the impetus for further capital value growth and further yield compression. Looking at Melbourne’s fringe office markets, capital value growth was even more pronounced in St Kilda Rd, with average A Grade capital values growing by 17.6% over the same period,” said Mr Girvan.

Whilst average A Grade net face rents in the Melbourne CBD remained stable in the 12 months to March 2019, falling incentives drove rental growth on an effective basis, with average A Grade rents increasing 2.4% over the same annual period.

According to Ms Mallik, “A lack of available space in the Melbourne CBD meant that leasing activity in Melbourne’s CBD office market was near record low levels. In the 12 month period to March 2019, Savills Research recorded circa 170,000 square metres of office space leased. This has been the main reason for muted rental growth, as a lack of leases means that we are not yet seeing a repricing, after record high pre-commitment activity in 2017 and the first half of 2018.”

In Sydney, capital value growth was once again more pronounced in the fringe markets, with average A Grade capital values in North Sydney and Parramatta increasing by 10.9% and 10.8% respectively, compared to 4.1% in the neighbouring Sydney CBD.

According to Ian Hetherington, National Head, Capital Transactions at Savills Australia, “Predictions of the yield compression cycle coming to a halt in Sydney CBD are still to eventuate, with average A grade market yields falling 20 basis points in the 12 months to March 2019, with current sales campaigns suggesting further falls over the remainder of the year.

“Investors are increasingly identifying Sydney’s fringe office markets as viable alternative investment destinations, particularly as these fringe markets benefit from the same demand drivers as the Sydney CBD, but at a considerable discount,” he said.

Looking West, the mining resurgence is having a positive effect on Perth’s office markets. Notably, foreign investors were the most dominant investor type in Perth CBD, accounting for half of all office sales (in dollar terms).

According to Graham Postma, WA Managing Director at Savills Australia “We are already seeing an increase in investor interest in Perth, with savvy investors eager to capitalise early on lower capital values.

“Average A Grade capital values in the Perth CBD were recorded at $8,000 per square metre, offering considerable scope for capital value growth, particularly as economic growth forecasts for the West Australian capital are notably stronger. In addition, relatively higher yields are drawing investors into the market. To put it into perspective, average A Grade yields in the Sydney CBD were recorded at 4.75% in March 2019, whilst in the Perth CBD, they were 6.90%.”

Ms Mallik went on to say “The Perth story is still coming to life, with forward looking demand drivers increasingly positive. Professional job advertisements grew by 14.5% in WA in the 12 months to Feb-19, indicating positive demand drivers over the next 9-12 months.

Most positively, lower AUD in conjunction with supply hindrances from Brazilian mines are set to boost our iron ore export earnings to the second highest level on record this financial year, resulting in notably higher growth forecasts for the Western Australia. The counter cyclical investment opportunity that Perth presents has also been a driving force behind investor sentiments. In the 12 month period to March 2019, we saw capital value growth in the Perth CBD recorded at 1.3%, whilst average A Grade market yields fell 35 basis points over the same period.”

Brisbane’s office markets continue their strong performance, with rental and capital value growth recorded in both the CBD and Fringe office markets.

According to Peter Chapple, QLD State Director of Capital Transactions at Savills Australia “Brisbane is in a unique position, benefitting from sharing similarities with both the other East Coast markets and resources’ reliant Perth. We have seen healthy employment growth across most of the main industries that drive growth in the Brisbane CBD office market, and a positive translation into tenant demand.”

Ms Mallik said “Employment forecasts by the Department of Employment point to ongoing growth in employment drivers, particularly across Government sector jobs. December quarter economic growth was driven by continued strength in government expenditure, with government final consumption increasing 5.6% in the 2018 calendar year. In particular, an ageing population saw ongoing spending by the Federal Government into health, aged care and disability services.”

This is particularly important for the Queensland economy, as lower median house prices in the sunny state have led to the largest levels of interstate migration nationally.

“There has been a skew towards older Australians moving to Queensland, clearly pointing to increasing demand from Health Care, Aged Care & Disability Services over the next five years. Employment forecasts for Greater Brisbane are increasingly skewed towards these government services, and there will be a natural flow on effect to tenant demand” she continued.

Whilst net face rents in the Brisbane CBD remained steady in the 12 month period to March 2019, falling incentives resulted in rental growth on an effective growth. Rental growth was more pronounced across Premium grade space, with half of total leasing activity in the CBD concentrated in the premium grade space, which is in line with occupiers’ movements due to ‘Flight to Quality’.

Mr Chapple said “Investment activity doubled in the current annual period ($1.93 billion in the 12 months to March 2019, compared to $526 million in the 12 months prior), compared to the prior period, with foreign investors driving demand for Brisbane CBD office assets, accounting for 62% of total sales volumes.”

In Adelaide, demand from the defense, mining and health industries in Adelaide is helping to strengthen Adelaide’s office market, with 12 month net absorption now positive two years in a row and falls in vacancy rates over 2018.

According to Adam Hartley, Director of Office Leasing in Adelaide at Savills Australia “The Adelaide CBD recorded sharp falls in gross incentives over the 12 months to March 2019, with average Premium grade gross incentives falling to 30% from a record high of 47.5%, whilst average A Grade gross incentives fell from 40% to 33% and average B Grade incentives falling from 45% to 35% in March 2019.

“Not surprisingly, we have seen notable growth in rents on an effective basis, with average A Grade net effective rents rising 11.2% in the 12 months to March 2019” he said.

Peter Isaksson, Director of Capital Transactions in Adelaide at Savills Australia said “Investment appetite for Adelaide remains elevated and the purchaser profile indicates that the yield proposition on offer relative to the eastern seaboard is highly attractive to investors operating under a counter-cyclical strategy.

“The 12 month period to March 2019 saw the highest recorded level of transaction volumes in Adelaide CBD office assets, with $679.1 million of office sales recorded over this period.”