_Victorian EOFY Commercial Market Overview

As we entered the financial year 19/20, we continued to see yields tightening for investment grade assets across all Melbourne markets. Strong buyer demand was being driven by record low vacancy rates, an increase in effective rents, and a reduction in incentives coupled with favourable borrowing costs. We also saw the gap between prime and secondary yields close to within 0.5% due to a shortage of opportunities.

Prior to the COVID-19 isolation period, the lack of commercial assets and strong demand continued to drive yields down with many sales achieving record results. There was continued interest from offshore groups as they looked to deploy capital into the Melbourne market. The development market was improving off the back of the strengthening residential market with confidence building and buyers looking for townhouse, land sub-division and apartment sites.

Transaction volumes for 2020 are significantly down. In fact, they are the lowest have been in the past 5 years. With the transactions that have taken place since March, we are yet to see much impact on price and expect this will come when the government stimulus concludes. Offshore buyers have dried up due to travel restrictions, which means in most cases they are unable to inspect the property and conduct due diligence. As we move into the latest lockdown, some buyers are hesitant to commit to a purchase, adapting a “wait and see" mentality due to uncertainty with the current income of an asset. Although quality assets with single tenants, long WALE and minimal capital expenditure are still attracting good enquiry.

During our recent Metropolitan Melbourne Office Update webinar on Wednesday 29 July, we conducted an audience survey and the results showed buyer demand is still strong with 33.3% of the audience indicating they would consider buying in the next 3-6 months. This was followed by 25% indicating they would consider buying in under 3 months. Location and amenity still drives investors, followed by tenant profile and occupancy of the building. With the uncertainty of whether tenants will actually still be in occupation and paying rent due, we expect we will see transaction numbers continue at a slower pace.

We also asked investors when they would next consider selling an asset. 55% of the audience indicated they would consider selling in over 12 months, followed by 20% in the next 9-12 months whilst a very small percentage would consider selling in the short-term. You can watch the full webinar here.

The Knight Frank Victorian team have continued to provide the ‘right’ advice for our clients that is relevant to the ever-changing market conditions and adapt the role of “trusted advisors” to our clients. We are aiming to provide our clients with as much market knowledge and feedback as possible so they can make informed decisions in relation to their properties. By conducting a number of Melbourne Office Market updates and webinars, we have provided a national overview on the market and drilled down into the Melbourne office market from a sale and leasing point of view. We have also uncovered how the sentiment of vendor and buyers changes throughout this period via the polls conducted. Owners advised in our latest webinar that they will be willing to increase incentives to maintain face rentals and commence renegotiations with tenants earlier than normal.

Looking forward, we will see pent up demand from investors due to the supply being at an all-time low. With investors reassessing their risk appetite, substantial capital will be ready to be deployed once supply increases.

If you would like to discuss opportunities within your market, please get in touch. 

Tim Grant, Partner, Head of Investment Sales, Victoria
Tim.Grant@au.knightfrank.com
+61 3 8545 8611
+61 478 666 275