15 May 2019

Melbourne catching Sydney as yield compression falls

Just a month after Savills Australia announced high demand for prime mixed-use freehold investments in Sydney, its latest global Impacts report reveals Melbourne recorded greater yield compression.

Falling 174 basis points since 2015, Melbourne leads the global market for yield compression, closely followed by Beijing (-132 basis points) and Berlin (-120 basis points).

While Melbourne and other Australian cities are still off the 3.0 per cent mark hit by other CBDs globally, James Girvan, Savills Australia’s Director for Capital Transactions in Victoria, says we can assume that yields in Australia will fall in a similar trend in the next five years. 

“This is even more so the case given Melbourne CBD’s status as a regional gateway city and the Sydney CBD’s status as a global gateway city,” he says.

“Throughout the past three years, we have seen growing investor demand from both foreign and domestic investors drive yields down to record low levels.”

But Girvan says investors aren’t only drawn to the Victorian capital by strong demand drivers and nation-leading economic indicators.

“The risk-adjusted return for Melbourne CBD remains among the highest recorded across all office markets globally,” he says. 

Sydney still an investment favourite

Before you fret, Sydney is still popular with international capital seeking prime real estate – particularly from China, Singapore and Malaysia – fuelled by significant infrastructure investment, strong population growth, and booming education and tourism sectors.

The harbour city is also popular with domestic investors, with five out of 10 freehold transactions in the Sydney city fringe, valued at $10 million plus, selling to local buyers.

“Throughout 2018, many owners sold their assets for a number of reasons including strong rental demand and record capital growth being achieved,” says Tom Tuxworth, State Director of NSW Metropolitan Sales at Savills Australia.

“The increase in values can be attributed to, in part, record low interest rates and a surplus of global capital flowing into Sydney over the last few years.”

Investment potential impacting yield

Shrabastee Mallik, Savills Australia’s Director for Research and Consultancy, says as interest grows yields are likely to fall.

“We are seeing more and more investors, both domestically and internationally, recognise the investment potential in Australia, which will likely drive yields further down in the short to medium term,” she says. 

“Based on global data, yields in Australia remain elevated, compared to comparable investment destinations, providing the impetus for foreign investors to invest in Australian office markets.”

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