Investment dollars are increasingly charting a course to the suburbs thanks to the ripple effect of worker sentiment. Major purchases of large office towers and developments are featuring alongside those of such smaller premises as sports facilities and run-of-the-mill retail shops, both the big end of town and mum and dad investors looking beyond CBDs for stable tenants and strong yields.
The change in focus has been noticeable for the first time in almost decade said Jones Lang LaSalle’s head of capital markets Luke Billiau, who forecasts that companies will eventually be making their real estate choices based on where the bulk of their worker’s reside.
Safe & secure
Suburban office developments generally attract long term, stable tenants and are situated in hubs surrounded by dense populations, both added benefits for investors spooked by the year’s unprecedented events. “In a lot of suburban markets you do get very large users that dominate buildings,” said Centuria Capital Group fund manager Grant Nichols. “Sometimes a single user over an entire building will take in some instances up to a 20-year lease.
“CBD buildings on the other hand are generally multi-tenanted which makes it very hard to get a WALE (weighted average lease expiry) beyond five years.” What’s more, there was a great tendency for larger tenants in suburban office developments to renew Mr Nichols said, adding: “There are a number of buildings that haven't had a day of vacancy since they've been constructed – and some of these buildings are over 30 years old.”
One significant purchase just outside a major city centre this year was the $72 million purchase of a Melbourne office building from Australian Unity by Japanese firm UD Australia (a subsidiary of Nippon Telegraph and Telephone Corporation) at a yield of 4.8 percent. The modern high-quality A-grade office tower in Carlton on the CBD fringe is almost wholly leased to the state government for the Environmental Protection Authority Victoria and the remainder to Trinity College, Melbourne University’s oldest college.
In Sydney it is newer buildings in metropolitan areas that are attracting investor attention as well as boosting confidence of developers, JLL analysis shows. In 2021 Chatswood, a major metropolitan commercial hub about 10km from the Sydney CBD, will see its first new A-grade commercial tower in 30 years take shape after approval from the Sydney North Planning Panel was given to a concept development application proposed by Chatswood RSL Club.
The proposal will deliver a new four-storey RSL Club and commercial tower of up to 18 levels in a first-class location adjoining Chatswood Railway Station. The entire development comprises a 22-storey building with a street-level public plaza spanning 1328sqm. Plans cater for over 260 car parking spaces at basement level.
A number of major agents were already involved in preleasing discussions demonstrating the strength of Chatswood’s market said Endeavour Property Advisory managing director Andrew Gibbons. The area represents “significant rental savings” compared to the CBD and North Sydney even though they are relatively close and linked directly by a major highway and train line.
“Companies are now looking at where they’ll be positioned post-COVID,” Mr Gibbons said.
“We expect around 80 per cent will go back to their traditional office albeit with some spatial adjustments.
“Organisations are actively discussing the need for collaboration and knowledge transfer to continue to drive revenues. Many CEOs and boards are realising this can’t happen if people are working fulltime at home.”
Mr Billiau said new developments triggered by upgraded public transport infrastructure and population growth tended to attract tenants predominantly from the government, healthcare and technology sectors – all industry types relatively unaffected by the pandemic and with robust income streams.
“Capital is focusing on asset quality firstly and in the period of social distancing, lower density buildings with less touchpoints to access those buildings,” Mr Billiau said.
“This will continue to attract tenants and provide security of that cash flow.”
Small is good
On the Central Coast, the closest major metropolitan area north of Sydney, the commercial market has remained resilient under the pressures of the year reports Raine & Horne.
While the office market is not as robust as experienced elsewhere, yields across commercial space on the Central Coast were averaging between 7 per cent to 8 per cent with Raine & Horne Commercial Erina principal Erina’s Brett Hunter seeing a continued demand for retail and industrial simply driven by lack of stock.
“Small businesses that are thriving require more space,” Mr Hunter said. “It’s translating to retail assets seeing a tiny 3 per cent vacancy rate.” Recent sales included a block of eight fully tenanted shops in Ettalong Beach for $2.95 million and a 1273sqm bulky goods facility for $2.8 million. An Aquatic and Fitness Centre at Terrigal sold for $3.2 million, a property that came with 2.03ha of prime acreage, a four bedroom residence, large machinery shed, and a 25m heated pool and spa.
Investors were being driven to such properties by the prospect of long leases, high-quality tenants, and appealing property locations Mr Hunter said. Owner-occupiers were seeking suitable premises amid a tight market for quality properties.
Mr Hunter also pointed out that investment was being stimulated by the soon-to-open NorthConnex project - a nine-kilometre twin tunnel that will link the M1 Pacific Motorway to the Central Coast by bypassing congested routes at Sydney’s northern tip.