Building becomes new black for commercial investors

Prime space in Melbourne’s CBD will dry up over the next four years.

The question of whether to buy or build commercial property just got murkier, with a new report suggesting building delivers more bang for an investors’ buck.

CBRE’s Viewpoint report says the increase in Australian commercial property values is far exceeding the cost of constructing new buildings, paving the way for a slew of new and redeveloped properties.

CBRE research analyst Alexander Salman says more investors are turning to construction to deliver large returns on their investment, with yields for existing buildings continuing to compress.

We have seen a pick-up in development activity, aligned to the theme of building rather than buying

“A number of significant investors have indicated that development is currently providing the best risk-adjusted returns at this point in the cycle,” Salman says.

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“As a result, we have seen a pick-up in development activity, aligned to the theme of building rather than buying.”

Salman says investors are finding it increasingly difficult to meet hurdle return rates when looking to buy properties in Australia’s capital cities, so are instead looking to redevelop properties they already own, as a way of maximising their returns.

“As a result, we are seeing some owners look to reinvest capital into their existing portfolio, as executing a development is more likely to meet hurdle rates of return,” he says.

“Higher potential returns associated with larger scale developments can effectively replace yield compression as the main driver of capital value uplift. Moreover, expansion can engender yield compression if it facilitates an asset moving risk-return style from core-plus to core.”

Other property owners are reinvesting in internal fit-outs to both increase rental returns and attract prospective tenants.