_Investment activity in the Brisbane Fringe office market reached record levels in 2017

The Brisbane Fringe office market recorded historically high sales turnover, with CY 2017 total turnover of $858.9 million (as at December 2017). This is well ahead of the $575.4 million for CY 2016 and exceeds the previous record of $799.6 million during 2014. Three transactions in excess of $100 million were the foundations of the strong result.

Jennelle Wilson January 17, 2018

The penetration of offshore investors into the Fringe market has also continued strongly during 2017 with offshore capital purchasing two of the three largest sales in 505 St Paul’s Terrace, Fortitude Valley ($205.5 million) and 520 Wickham St, Fortitude Valley ($119.15 million). Offshore purchasers have been the greatest net purchasers of Fringe assets over the course of 2017. Offshore buyers acquired $408.5 million of Fringe assets over the year and disposed of $143.4 million.

The only other investor type to be net purchasers of Fringe assets were the private investors with five assets transacted. The largest was Ralph Sarich’s Cape Bouvard Properties purchase of 12 Commercial Rd, Newstead for $47.0 million.

Unlisted Funds and Syndicates also remained active in the market with acquisitions of $312.3 million across five transactions, the largest of which was Impact Investment Group’s completion of the fund through purchase of 5 King St, Bowen Hills for c$140 million in early 2017.

Significant disposals of $468.5 million resulted in these unlisted funds being net sellers across the year. AREITs have remained largely out of the market during 2017 due to the superior purchasing power of offshore and wholesale funds at this time. This is not expected to change in the short term with offshore buyers having both the appetite and capacity to transact at current yield levels.

The record-breaking turnover in the Fringe during 2017 underlines the investor acceptance this market now receives. The size and quality of recent developments has expanded the stock of institutional quality assets, further consolidating market activity. The availability of existing assets for sale is currently diminished, however continued purchaser focus on the region is likely to create further opportunities in 2018.

The weight of money seeking both core and value add investments has continued to push both prime and secondary yields lower. The average prime yield series, based on WALEs of 5-7 years, has contracted a further 38 basis points over the past 12 months to a median of 6.65%, with a range of 6.05% - 7.25%. At this time the contraction has been the greatest in the Fortitude Valley and South Brisbane markets.

In contrast, Milton and Toowong has received lesser institutional investment demand with pure investment yields not contracting to the same level as other precincts due to the tougher leasing market and uncertainly surrounding the backfill space to be created by Origin.

However counter-cyclical purchasing has emerged in Milton with 12 Cribb St ($12.9 million), 189 Coronation Drive ($17.5 million) and 8 Gardner Close ($10.6 million) all having recently transacted. The precinct’s location adjacent to the CBD, views over the Brisbane River and train station access means that the underlying land retains high value over and above current high office market vacancy.

Yields for secondary assets have contracted at a rate on a par with the prime stock, down by 33 basis points over the past 12 months across a range of 7.50% - 8.70%. Unless a secondary asset has the scale and scope for refurbishment and re-leasing to a tenant with strong covenant, demand is limited.

While the Fringe leasing market remains relatively softer in comparison to the CBD, the Fringe appears to be on a par with the CBD in terms of investor acceptance. At just 33 basis points the spread between the median prime yields for the CBD and Fringe is at lows not seen since 2005.

For further information, including an analysis of the leasing market and rental forecasts see the full report.