‘Mexican wave’ of bids sees Melbourne office smash reserve by 73%

The office building at 387-399 City Rd, South Melbourne.

A Melbourne office building has sold more than $5 million above its reserve price – trumping the reserve by 73% – as demand for sites with development potential remains feverish.

Agents described the bidding frenzy for the office building at 387-389 City Rd, Southbank, as a “Mexican wave” of hands flying into the air as the price motored past the reserve of $7 million.

And the bidding didn’t stop until it reached $12.1 million, with Melbourne development and investment group River Lee the last bidder standing.

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Touted as an “outstanding landbank opportunity”, the inner city site spans 1220sqm with a two-level building providing 1339sqm of lettable space.

While an office is the site’s current use, investors see significant development upside.

It is currently leased to two tenants for a combined $410,880 annually, and has 19 on-site car parking spaces.

Under its current zoning the site can’t be developed significantly, but Allard Shelton’s Michael Ryan, who marketed the property with colleagues Joseph Walton and James Gregson, in conjunction with CBRE’s Josh Rutman and Sandro Peluso, says that bidders clearly believe they would be successful in having it rezoned in the future.

“There’s some upside there with regards to development, but that’s probably more future development, as it’s currently zoned Industrial 1,” Ryan says.

The site spans more than 1200sqm with a prime corner position in South Melbourne.

“The buyer we believe is very comfortable with the fact there’s going to be a rezone in the future, because I think they’ve paid a price based on a rezone happening.”

Ryan says both agencies fielded hundreds of enquiries about the property throughout the campaign, with more than 150 people turning out to the auction.

But he says they were still shocked at the result, which represented a yield of 3.2%.

Two tenants currently occupy the building, paying more than $400,000 in combined rent.

“We certainly didn’t anticipate it going for $12.1 million. We probably saw it going for in excess of $7 million, where the reserve was. But 73% above reserve is significant,” he says.

“Don’t get me wrong, (the interest) was strong. There were multiple parties that saw value in excess of $10 million. You hear people say it’s like a ‘Mexican wave’ of bids, and that’s what it was. There were bids everywhere.”

Walton says the strength of and confidence in Melbourne’s office market continues to be a driving factor in many recent standout results.

“There’s a lot of confidence in the office market at the moment and I think that is propositioned by the underlying growth that’s going to be enjoyed by office rents,” he says.

“This, intermingled with that long-term development play or potential, ticks all the boxes for a lot of buyers.”