_Brisbane – on global investors' radars

As transaction volumes for many of the major gateway cities began to decrease from 2016 and into 2017 as the lack of stock available for sale took hold, other cities began to attract a greater share of capital allocation.

One of these cities is Brisbane which, with a leasing market that has started to show positive signs, is capitalising on the low yields and limited stock available in Sydney and Melbourne to attract a greater share of investment into the city’s office market.

The capital of Queensland is the service centre for an area of 1.85 million kilometers and a population of 4.7 million persons. The office core across the CBD and Fringe markets totals 3.5 million sq m of space and has recorded transactions of $US7.9billion in the past five years.

While the 2016-17 total of $US1.73 billion was just below record levels this accounted for 19% of all office sales, by value, across the Australian market, a six year high.

Nationally, office sales (AUD$10 million+) transacted during 2016-17 totalled $US9.2 billion, 37% lower than 2015-16, which is now expected to be an historical peak for transaction volumes. A lack of core assets available for purchase, particularly within the major CBDs of Sydney and Melbourne, hindered the level of activity with investment interest in Australia remaining at high levels.

This demand has continued to push yields for core assets to new lows and some cost-sensitive purchasers are now either broadening their interest to other Asian or Australian markets or waiting on the sidelines for trophy assets to be available.

As shown in Figure 1, the investment into the major CBD markets of Sydney and Melbourne was significantly lower in 2016-17 across both offshore investors and the market as a whole.

Increasing interest in other CBD markets such as Brisbane, and also more recently Perth, has seen investment levels hold relatively firm in the remaining CBD markets, although the proportion of offshore investment remains lower in these markets. 

Transaction Volumes by Sub-market 2015-16 versus 2016-17

$ billion total transaction value (asset sales $AUD10 million+)

Source: Knight Frank Research

The Brisbane market accounted for 19% of all office transactions by value during 2016-17, up from 13% in the year before and 8% in 2014-15; as buyers recognised the city provides greater purchasing opportunities and higher yields in a similar economic environment to Sydney and Melbourne. 

One factor holding back the Brisbane market, particularly the CBD, has been a relatively weak leasing market. However, with the prime gross effective rental showing positive annual growth of 4.1%, the first appreciation in more than four years, this element is unwinding.

The certainty that the leasing market has bottomed in the Brisbane CBD is providing impetus to the investment market with there now seen to be a time limit to purchase Brisbane assets to fully benefit from the expected recovery in tenant demand.

 While there are more assets becoming available in the Sydney market, which is expected to see volumes rebound in 2017-18 for that city, the hunt for yield and greater sophistication and risk appetite of investors will ensure that more than just the gateway cities are targeted for increased asset allocations.

From a global perspective, Australia is punching well above its weight in terms of demand from offshore capital, which coupled with meaningful local demand has been driving significant yield compression.

In this low yield environment the sheer weight of global real estate capital, and the diversity of buyer types is deeper than ever before and these investors are open to a wider sphere of geographies and purchasing opportunities than ever before.

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