Office money to come for smaller cities

Brisbane and Perth are already attracting increased investment interest.

Investors are tipped to chase office towers outside the hot markets of Sydney and Melbourne as they begin to show better value than the two gateway cities where values have already soared, according to an analysis by real estate firm JLL.

A run of purchases in Sydney by local heavyweights Charter Hall and MTAA Super, as well as US groups Blackstone and AEW, have put the rise in values on display.

JLL says there are more opportunities in Brisbane, Adelaide, Perth and Canberra as the yield gap between those cities and the two main capitals has blown out.

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JLL head of office investments, Australia, Rob Sewell predicts a more diverse group of investors will come from offshore and they will be willing to try new areas.

“While Brisbane is already on the international radar, we will see more cross-border investment into Perth, Adelaide and Canberra. The level of interest in these geographies will depend on the availability of product to meet the investment mandates of overseas investors,” Sewell says.

He cites tangible signs of a leasing recovery in Brisbane and Perth, which has led to more counter-cyclical investors in those cities.

JLL’s annual office report says that while investment volumes in Australia hit a record at $19.53 billion last year, the result was heavily influenced by Oxford Properties acquiring the IOF portfolio for $3.4 billion.

While Brisbane is already on the international radar, we will see more cross-border investment into Perth, Adelaide and Canberra

Sewell cautions that office transaction volumes will be 10-20% lower this year, unless a major corporate play emerges.

While opportunistic investors chased other capitals, Sydney and Melbourne would be weighted towards development-led opportunities, he says.

Offshore investors played a major part in the office market last year, accounting for 48.4% of all deals by value. The top three nations for investments are Canada, the US and Singapore.

Offshore investors are tipped to remain active in 2019 and Japanese investors are purchasing more, with Mitsubishi and Daibiru Corporation already buying.

The agency also predicts that currency moves could help local property, arguing that if the Australian dollar drops further, US dollar denominated funds could invest.

JLL head of research, Australia, Andrew Ballantyne, says there is also value available in Sydney and Melbourne this year.

He says there is the potential for positive net effective rental growth over 2019 and 2020 and adds there is the prospect of net effective rental reversion of 15-35% for leases expiring in 2020.

JLL says Parramatta and Melbourne’s fringe have the required scale for institutional investment.

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