Melbourne Leads CBD Global Markets in Yield Compression

Melbourne CBD recorded the greatest yield compression globally across the past three years for CBD office markets, reveals Savills latest Impacts report.

Taking in the level of yield compression across key global CBD markets, Melbourne led with rental yields falling 174 basis points since 2015.

Savills’ Victoria director for capital transactions James Girvan said investors are drawn to the Victorian capital thanks to solid demand drivers and nation-leading economic indicators.

“Throughout the past three years, we have seen growing investor demand from both foreign and domestic investors drive yields down to record low levels,” Girvan said.

“The risk-adjusted return for Melbourne CBD remains among the highest recorded across all office markets globally (according to latest available data from the MSCI IPD).”

Beijing followed the Victorian capital with a drop of 132 basis points and Berlin ranked third recording a fall of 120 basis points.

Related: Dexus Seizes Whole Block in $1.48bn Deal

The report explores the link between office yields and borrowing, Savills found that investors’ profiles have changed with fewer investments reliant on bank finance.

While Australian cities are still off the 3 per cent mark hit by other global CBD markets, Girvan described it as “prudent to assume” yields in Australia would fall in a similar trend in the next five years.

“This is even more so the case given the Melbourne CBD’s status as a regional gateway city and the Sydney CBD’s status as a global gateway city,” he said.

The report said a rise in interest rates would be unlikely to result in a corresponding rise in prime office yield.

Related: Sydney and Melbourne Office Crunch Not Seen Since the ’80s

Across the globe, CBD prime office market yields are now sub -3.0 per cent in Hong Kong 2.43 per cent, Frankfurt 2.9 per cent), Tokyo (2.9 per cent) and Berlin (2.9 per cent), in a reflection of the new benchmarks being set globally.

Savills report expects that the Paris and Amsterdam prime CBD office markets, which sit at 3 per cent and 3.5 per cent respectively, could see market yields harden to under 3 per cent by the end of 2019.

Savills’ head of Asia research Simon Smith says due to the threat of a US-China trade war easing there’s a resurgence in demand for prime offices in Asia-Pacific after activity weakened in the latter half of 2018.

“2019 is therefore unlikely to see any movement outward in yields,” he said.