The article originally appeared in The Sydney Morning Herald.
Lendlease’s Australian Prime Property Fund Commercial has taken advantage of the demand for prime office assets with the sale of 25 Constitution Avenue, Canberra, for $115.10 million.
Although office tower occupancy is still low with workers in lockdown, the lifting of restrictions and high vaccination rates have given landlords and investors confidence that office blocks will return to life in coming months.
New research from Knight Frank Australia research reveals that prime office yields have compressed over the past 12 months across all major office markets despite renewed lockdowns and higher vacancy as a result.
The report says compression has been strongest in the smaller markets of Canberra and Adelaide, which have seen yield compression of 50 and 80 basis points respectively, compared to 10 basis points in the lower-yielding Sydney and Melbourne markets.
Knight Frank Australia chief economist Ben Burston said the improvement in yields data reflects strong pricing and robust investor demand for prime offices, with CBD office values returning to growth in the first half of the year despite higher vacancy rates.
“The return to yield compression in prime office markets is revealing in that it comes in spite of higher vacancy and continued movement restrictions. It speaks to the strength of the impact of lower interest rates and to the weight of investor demand, particularly from offshore capital, seeking to allocate into the Australian market,” Mr Burton said.
“The fact that yields have compressed more in Adelaide and Canberra also indicates that investors are pricing across markets, which is shifting to a more equal footing. Prior to the pandemic, the stronger rental growth performance of Sydney and Melbourne was commanding a substantial premium in terms of lower yields.”
Mr Burton added that notwithstanding higher vacancy rates, investors were showing signs of optimism about prospects for the office market beyond the pandemic.
“We expect that the current momentum will carry forward into 2022, with office yields likely to maintain a downward trajectory aided by economic recovery and the release of pent-up demand in leasing markets,” he said.
For APPF Commercial, cash raised from the sale to the RAM Australia Diversified Property Fund will help the acquisition earlier this year of 469 La Trobe Street in Melbourne.
Along with the fund’s adjacent 485 La Trobe asset, it provides the opportunity to create the Flagstaff sub-market’s flagship office precinct, providing long-term strategic options by creating a 5000 square metre combined landholding with direct parkland frontage within the Melbourne CBD grid.
Scott Mosely, managing director, investment management at Lendlease, said the sale would allow APPF Commercial to recycle capital into precincts seen as highly sustainable and “offer amenity, flexibility and connectivity for tenants”.
The acquisition also represents RADPF’s second government-tenanted building in its unlisted fund. JLL’s Tim Mutton and Luke Billiau, and CBRE’s James Parry and Nic Purdue managed the sale of 25 Constitution Avenue on behalf of APPF Commercial.