MELBOURNE OFFICE INVESTORS HEAD FOR THE FRINGE

TIGHTENING yields in the Melbourne CBD office market is pushing investors into the suburbs, with one major commercial agency expecting this to be the next property hotspot for the city.

And it appears that's where more local buyers are focusing their attention, according to a new CBRE Viewpoint.

The report has revealed there is a flight to income under way across Melbourne, with domestic and foreign investors seeking out metropolitan office assets, which offer higher yielding opportunities.

Demand for suburban office assets across Melbourne has steadily increased over the past 12 months, with investors snagging $1.7 billion worth of sales, up from about $620 million in the previous corresponding period.

The suburban market comprises about 40 per cent of Melbourne's total office stock with the outer east racking up $780 million in sales and the city fringe precinct $450 million in the past year.

Jamus Campbell, CBRE's associate director of metropolitan investments, says rising capital values in the Melbourne CBD, coupled with contracting yields and a shortage of stock, have priced some investors out of the market.

"Capital values in Melbourne's suburban precincts have remained substantially below CBD levels, making them significantly more accessible, and, subsequently attractive," he says.

While the bulk of demand for suburban office assets has primarily been driven by domestic buyers, foreign investors continue to flex their strength, accounting for about 25 per cent of sales over the past 12 months.

In comparison, foreign buyers accounted for close to 50 per cent of transaction activity in the Melbourne CBD. 

The report shows heightened demand for suburban offices has underpinned an 11 per cent rise in capital values over the past year, averaging $3975 per square metre for prime suburban assets and $3255 per square metre for secondary.

Yields have sharpened by around 65 basis points year on year to 7.7 per cent for prime grade office assets, and 8.1 per cent for secondary.

Campbell says residential conversion activity has also supported demand for suburban office assets across Melbourne.

"With Melbourne's residential market running red hot, there has been more demand from developers looking to acquire suburban office assets for higher and better use," he says.

"This can be seen through the city fringe and inner-eastern markets where the underlying zoning of the property allows for future residential upside and therefore lends itself to a shrinking market for office space, which should put upward pressure on rents."

CBRE research analyst Anne Flaherty says a number of speculative developments earmarked for Melbourne's suburban market indicate the market's strength.

"The 16,000sqm under construction at 35 Dalmore Drive, Scoresby, and 15,800sqm at 1367 Dandenong Road, Chadstone, both in Melbourne's outer east, are testament to the high level of confidence in the suburban market," she says.

Melbourne's suburban office market also benefits from a low vacancy rate compared to other office precincts across the country.

With the exception of Sydney, at 6 per cent, central business districts in other Australian states recorded double digit vacancy. Brisbane recorded 15 per cent, Adelaide 12 per cent and Perth 17 per cent.

In July last year, Melbourne's suburban vacancy was 7 per cent, lower than the 8 per cent recorded in the CBD.

"Melbourne's suburban market has a broad tenant mix, with tenants spread across a wide range of industries," says Flaherty. "This tenant diversity provides some resilience in the event of shocks to specific industries."