FY19 CRE investment reaches new record high of $42.9b as market remains in ‘strong territory’

John Sears • 05/07/2019

A bumper year for office deals has pushed investment in Australian commercial real estate to a new record level of $42.9 billion in transactions during the 2019 financial year (FY19), according to Cushman & Wakefield research.

The footprint of coworking office space continues its rapid ascension across Australia’s east coast, today accounting for over 470,000 sqm across Sydney, Melbourne and Brisbane office markets. However, according to Cushman & Wakefield research, coworking space remains a relatively small part of the office landscape occupying 2.8% of the east coast CBD office market.

During the financial year, investment in office assets reached a new high of $23.4 billion boosted by a number of major transactions as the financial year came to a close. This was led by Dexus acquiring 80 Collins Street, Melbourne for $1.476bn, and the sale of 100 Market Street and 77-85 Castlereagh Street, Sydney to Blackstone for $1.52 bn.

Office investment volumes were highest in New South Wales which recorded a total of $10.2 billion in FY19, with Sydney remaining the most active market for office transactions in FY19 supported by robust fundamentals in the leasing market. Cushman & Wakefield research shows that Sydney CBD prime gross effective rents grew 9.1% in the 12 months to June 2019, well above the long-term average, while vacancy
declined to 4.1%.

While office yields also remain low, investor demand is also supported by the relative attraction compared to bond yields that have fallen significantly over FY19.

Cushman & Wakefield’s Head of Research, Australia and New Zealand, John Sears, said: “Investment in Australian commercial property remains in strong territory, with sustained investor demand for office assets across the country as rents ran higher and vacancies tightened. We saw landmark office deals in Sydney and Melbourne recently completed, and the pipeline remains strong. In Brisbane, the investment outlook remains positive and a number of office assets are commanding strong investor interest and are likely to transact in Q3.”

“With the bond yield falling around 130bps in the 2019 financial year and office yields remaining steady, the relative attraction of these assets also helped buoy investor demand. However, we are not yet calling the bottom of the yield cycle. Solid rental growth, improving funding costs plus the blowout in the spread to bonds suggests there is still room for commercial yields to decline further,” Mr Sears said.

Beyond the CBD, deal activity in the Sydney metro office market also increased in the most recent quarter with the sale of Zenith Centre in Chatswood to Starwood Capital for $438 million, Early Light acquiring Cromwell’s 50% interest in North Sydney’s Northpoint Tower for $300 million and Suntec’s $297 million purchase of 21 Harris Street in Pyrmont.

These transactions helped foreign investment to trend higher in FY19, recording a total of $19.3 billion and accounting for 45% of all transaction volumes. Multinational investors such as Blackstone were among the major source of foreign investment into Australia, while Canada and Singapore were also prominent sources of inbound capital.

Cushman & Wakefield’s Managing Director CRE NSW, Simon Fenn, said: “The combination of stock withdrawal, the development of quality pre-committed supply and an unprecedented infrastructure spend is drawing both local and offshore capital.”

“With CBD stock unable to meet demand, investors are increasingly looking to metro areas that are also experiencing strong leasing conditions.”