Optimism returns and transactions rise from strength to strength

A surge of confidence is driving the Sydney and Melbourne markets following a volatile 18 months as office tower deals in NSW and Victoria hit $4.5 billion in the September quarter, marking the second-strongest third-quarter tally yet.

As reported by the Australian Financial Review, the prospect of the international borders reopening has spurred the rise in office tower transactions in Sydney and Melbourne, accounting for 76 per cent of nationwide quarterly office investment of $5.9 billion – leading to what is expected to be a strong fourth quarter.

According to CBRE’s third-quarter 2021 research report, sales volumes across the quarter were up 113% compared to third-quarter 2020, highlighting the continued investor demand for Australian office assets. The report also highlights that leasing enquiry levels in Sydney remain robust, with enquiry volumes at their highest level since 2017.

The most significant transaction of the quarter was the National Pension Service of South Korea buying the Melbourne Quarter Tower from Lendlease for $1.2 billion.

The 70,000sqm building is currently under construction and will be anchored by Medibank for 17,500sqm.

Activity has rebounded ahead of the reopening of the Sydney and Melbourne CBDs, with office volumes continuing to step up each quarter. According to CBRE, transaction volumes in 2021 are expected to reach levels similar to the period from 2014-18, highlighting the significant rebound in activity this year.

Stimulated by growing confidence among investors, the retail sector had its strongest third quarter in three years, with transactions totalling $2.5 billion in the third quarter according to the AFR. Led by the Casey Central Shopping Centre in Melbourne, selling for $225 million to Haben Property Fund, partnered by Hong Kong investor JY Group.

Although 78% of retail transactions in 2021 have been to domestic investors, this may change next quarter with a large volume of assets expected to transact in Q4 2021, according to CBRE.

As Australia’s vaccine rates rise to be among the highest in the world and international boarders open, foreign investors are expected to return in 2022, with improved business sentiment and strong labour demand underpinning the economy’s recovery.

The COVID-driven domestic buyer arbitrage in the investment grade real estate sector, as discussed in previous editions of The View, will likely dissipate as international buying competition for onshore assets heats up.

With the increased demand a result of boarders reopening and a continuation of sharpened capitalisation rates on quality assets.

Stay tuned for next week’s edition of The View, which will focus on the risk elements we see in the market and macro-economic climate.

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