Investment in commercial real estate climbed to $42.6 billion in transactions during the 2019 financial year, according to new data from Cushman & Wakefield.
Record low vacancy rates in Sydney and Melbourne, combined with rental growth, also drove deal flow in office property up by 22.6 per cent, to $23.1 billion for the financial year.
The $42.6 billion figure marks a 22 per cent increase in transactions value over the previous year.
Driving office deals are record low vacancy rates in the Sydney and Melbourne office markets, which is underpinning surging rents, creating pent-up demand and high pre-commitment levels.
Sydney's office market, driven by office withdrawals and a strong economy, continues to suffer from pent-up demand and high pre-commitment levels.
Sydney CBD prime gross effective rents grew 9.1 per cent in the 12 months to June 2019, well above the long-term average, while vacancy declined to 4.1 per cent.
Vacancy in the Melbourne CBD office market is nearing an all-time low, supported by strong population growth and significant pre-commitments across the upcoming supply pipeline.
Several landmark transactions were behind the elevated volume, including Scentre Group’s sale of 100 Market Street and 77-85 Castlereagh Street to Blackstone for $1.52bn and QIC’s sale of the 80 Collins Street precinct to Dexus for $1.476 billion.
“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,” Cushman & Wakefield head of research John Sears said.
“We saw landmark office deals in Sydney and Melbourne recently completed, and the pipeline remains strong.”
According to Cushman & Wakefield foreign investment accounted for 37 per cent of total investment volume in Q2, and 45 per cent or $19.0 billion for the financial year.
Rolling annual foreign investment volume increased from 31 per cent ($10.8 billion) between 2017 and 2018 to 45 per cent at the close of the 2019 financial year.
Foreign investment in the office sector increased increasing from 42 per cent at the end the 2018 financial year to 53 per cent at the end of the 2019 financial year.
Multinational investors such as Blackstone were among the major sources of foreign investment into Australia, while Canada and Singapore were also prominent sources of inbound capital.
Cushman & Wakefield managing director Simon Fennsaid the combination of stock withdrawal, the development of quality pre-committed supply and an unprecedented infrastructure spend was 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.”
Office investment volumes were highest in NSW, which recorded a total of $10.2 billion in the 2019 financial year.
Transactions were also buoyant in Sydney’s metro markets, including the acquisition by Starwood Capital and Arrow Capital Partners of the Zenith Centre in Chatswood for $438.2 million, a record price for an office asset outside of the CBD.
In other big Sydney metro deals in recent weeks, Hong Kong billionaire Francis Choi’s Early Light bought the remaining half-stake in North Sydney’s Northpoint Tower for $300 million, while Singapore’s Suntec’s made a $297 million purchase of 21 Harris Street in Pyrmont.
“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,” Sears said.
“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.”
