The value proposition of the Melbourne suburban marketFebruary 21, 2014 / By
Non-CBD office markets were less liquid in 2013 than CBD markets. The Melbourne suburban office market has accounted for only 7% of transactions by value over the past 12 months. In periods of low liquidity, the yield spread between CBD and non-CBD office markets widens above historical benchmarks. Currently, the spread between Melbourne CBD and Melbourne suburban office market is wider than the long term average.
The current spread between the tighter end of the yield range in the Melbourne suburban office market and the Melbourne CBD is 175 basis points – well above the long term average of 110 basis points. The current spread implies prime grade assets in Melbourne’s suburban market are attractively priced to the CBD, with an additional liquidity risk premium for the suburban office market of 65 basis points.
This combined with low vacancy, a moderate supply outlook and the potential for effective rental growth offers a strong investment proposition for the Melbourne suburban office market.
The Melbourne suburban market has doubled in size over the past decade and is now one of the largest monitored non-CBD office markets in Australia (by NLA) with 1.31 million sqm of office stock. Jones Lang LaSalle has assessed the indicative market value of the suburban market at approximately $4.25 billion, accounting for 12% of market value across all non-CBD office markets in Australia.
Unlike the CBD, physical market conditions across the Melbourne suburban office market have been relatively solid since the financial crisis of 2008. The suburban market was the only market across Melbourne to record positive net absorption in 2013, and has recorded 20 successive years of positive net absorption between 1994 and 2013. Vacancy rates remain low with limited speculative development going forward. Only 48,700 sqm of space is currently under construction across the suburban market, equating to 3.5% of total stock. With development under-written by a high level of pre-commitment (approximately two-thirds of space currently under construction) supply additions will be below trend between 2014 and 2016. Low vacancy and a stable demand environment have exerted upward pressure on rents, with Jones Lang LaSalle recording 31.3% growth in prime net face rents between 2007 and 2013.
A combination of factors including low vacancy, a moderate development outlook and yield spreads between the CBD and suburban office market, above the long-term average, provides an investment case for the Melbourne suburban office market. The increasing appetite for office product with core characteristics will continue through 2014. We anticipate a number of investors will be pushed up the risk curve due to a lack of core product, or pulled by the investment proposition of the Melbourne suburban office market.
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