Office buildings that lie outside Melbourne’s CBD are set to show strong price growth and are significantly undervalued according to a new office market report.
The report is from BIS Oxford Economics and it forecasts office property values to rise over the next five years.
“We’re looking at a prospective five-year internal rate of return [IRR] of around 10 per cent on average across Melbourne’s non-CBD office markets,” BIS senior project manager and report author Maria Lee told Australian Financial Review.
The BIS report found that this growth in suburban office values wouldn’t mean CBD office prices would stop rising as a result.
“We assess prime grade CBD offices as being fairly valued in relation to prospective returns over a five-year horizon while non-CBD assets are considerably undervalued,” Ms Lee said.
The forecast for suburban office price growth is based around favourable supply and demand conditions.
Ms Lee said the best growth opportunities were in non-CBD areas which hadn’t yet experienced the widespread growth and tightening of yields that had occurred in the city.
“City fringe markets like South Melbourne, Richmond and Cremorne are likely to do very well near term, as vacancy rates are low and demand solid,” she told AFR.
“Rents too have been soaring.”
Ms Lee said the flow on effect would most likely occur in the medium term to markets such as Hawthorn, Camberwell, Monash, Mulgrave and Notting Hill.
CBRE’s Gianni MacDonald told AFR that the office vacancy rate in in the East Melbourne market of Boroondara was at a record low 3 per cent and the tightest he has seen it for ten years, and investors are taking note.
Suburban offices have surged to the top of commercial property investor’s purchasing lists ahead of other assets according to the March quarter Australian Market Expectations survey.
Sam Tamblyn is the managing director at Urban Property Australia which helped create the survey and said office buildings outside Melbourne’s CBD were currently more popular investments than any other commercial property asset class.
“The record low-cap rates achieved in the respective CBD office markets have increased investor focus in the suburban office market,” he told AFR.
“Investors believe non-CBD assets have better prospects for cap rate compression.”