Established buyer groups continue circling the Melbourne commercial office market
70% of all Melbourne CBD and fringe investment transactions in 2020 have been dominated by existing players in the Melbourne market whilst Sydney’s buyer pool remains more diverse
MELBOURNE, 28 SEPTEMBER 2020 – A string of recent office transactions suggest that experienced players in Melbourne and Sydney are continuing to actively pursue assets during the COVID-19 pandemic, demonstrating Melbourne’s resilience as a key Australian investment market.
According to a recent study by JLL, approximately 26 % of all commercial property transactions in 2Q 2020 and 3Q 2020 have been in the office sector, with a number of established investors surfacing as eventual purchasers. Additionally, Victoria is currently experiencing similar transaction levels to New South Wales, despite the challenges presented by the local lockdown measures in the southern state. However, volumes in both states are significantly down compared to the same time in 2019.
JLL’s Head of Middle Markets and Metropolitan Investments - VICTORIA, Josh Rutman said, “Buyers are taking a more prudent approach, but there remains a notable amount of transactional activity in the sub $150 million space, with groups showing appetite to take on leasing and tenancy risk for the right product. Deals are being structured in more creative ways so as to protect the interests of both vendors and purchasers, which is requiring a more experienced and patient agency approach.”
“In Melbourne, after several new entrants dominated transactions in the non-institutional sector, there has been a swing back to well-known and established players. Most buyers have been domestic and international fund managers and syndicators, including household names like Vantage Property Investments, Time & Place, Prime Value, Tong Eng Group and Costa Fox. In Sydney, the buyer pool has been more diverse, with several private family groups also taking part in the transactional activity,” Mr Rutman said.
2020 has seen a swing to offshore groups buying in Melbourne’s institutional office markets. These include Canadian based QuadReal’s first foray into Australia through the Melbourne fringe’s largest office acquisition to date - 200 Victoria Parade, East Melbourne and Singapore sovereign wealth fund GIC’s first Melbourne acquisition into Rialto Towers (50%) and 222 Exhibition Street (50%).
According to JLL Research, domestic purchasers were particularly dominant within Melbourne between 2018-2019, accounting for 67% of the total transaction volume. This was led by acquisitions from major institutional groups including Dexus, Charter Hall and GPT. Melbourne’s commercial office sales to date have reached a total of $2.16 billion.
Mr Rutman continued, “Most investors are applying a harsher lens towards tenant covenants and assessing the certainty of future income over time. It has become critical to ensure that buildings are well placed to respond to the projected rise in unemployment by catering for a range of tenancy sizes and business types and ensuring that the asset’s location remains relevant for certain tenant sub-sectors. Therefore, buyers are structuring deals that minimise their exposure to potential risks such as ongoing rental abatements and vacancy.”
“Buyers with genuine purchasing intentions are discovering different structures and terms being available to assist in establishing mutually favourable outcomes. On the other side of the fence, owners are demonstrating more patience and working closely with buyers and their consultants to ensure smooth assessment and investigation periods.”
In 2020, more than 70% of the office market deals in Victoria have been sold on an off-market basis (compared to 21% in 2019), a sign that the broader market is still yet to confidently ascertain new rental and capital value benchmarks. However, those owners that have elected to sell via an on-market process have been handsomely rewarded, demonstrating that many investors are confident in the long-term prospects for the office sector.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion in 2019, operations in over 80 countries and a global workforce of nearly 93,000 as of June 30, 2020. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.