Australia’s 2024 office market presents golden opportunities for astute investors

Shrewd investors are waiting in the wings for Australia’s office values to reset, as APAC experiences a six-month lag with only an average of -8% revaluation by September 2023, compared to the Americas and EMEA, which experienced revaluations of -23% and -28%, respectively.

After office investment volumes declined by 76% to reach $3.6 billion in 2023, this year presents compelling counter-cyclical opportunities for foreign investors, who accounted for 44% of Australian office investment last year, according to Colliers Head of Office Capital Markets Adam Woodward.

“Foreign investors recognise Australia’s market as a safe-haven and anticipated economic equilibrium will start to elevate sentiment this year.” Mr. Woodward said.

“Fundamental drivers of demand, such as population and employment growth, is underpinning strong leasing metrics and the long-term investment proposition of Australian office assets, which won’t witness a value drop as severe as the Americas or EMEA.”

A marked increase in leasing activity occurred over 2023, with the Colliers national cumulative gross leasing volume transacted reaching around 741,000sqm, which is 42,200sqm more than in 2022 or an increase of 6.0%.

Both occupier and investor preferences for quality stock will continue to elevate Premium assets above the rest of the office market, and the yield spread between Premium and A Grade assets is anticipated to expand by an additional 21 basis points from now until December this year. Similarly, the spread between Premium and B Grade office yields is likely to grow by a further 25 basis points over the same period.

Secondary assets ripe for repositioning also drew investor attention, including 1 Margaret Street in Sydney, which attracted a record 65 tours during the campaign period before being sold by Colliers, on behalf of Dexus, for $293.1 million in August. The purchaser, Quintessential, has planned a $90 million multi-staged refurbishment.

“Capital sources seeking stability and growth will continue to discover opportunities in accordance with nuances across Australia’s CBD office markets.” Mr. Woodward said.

“Sydney CBD may be the first mover when investment activity begins to ramp up around June 2024, since underlying investor sentiment currently favours Australia’s largest office market, and the value of transaction volumes over 2023 proved most resilient compared to other locations.”

While most office markets experienced a drop in total investment value over 2023 comparable to that experienced during 2008, there was only around 45% difference between Sydney CBD’s deal flow of $1.716 billion last year and the previous year, according to Colliers National Director of Research Joanne Henderson.

“We expect Sydney CBD’s average prime capital values to recover by around 10% from June 2024 to December 2025, supported by stabilising occupier markets and resilient rents, following average Prime net face rental growth of 3.9% over 2023.” Ms Henderson said.

“Occupier demand for quality over quantity and a clear pull-to-precinct will also continue to define the Melbourne CBD market this year, after Eastern core average capital values only declined by around 9% over the 12 months prior December 2023, compared to 15% for the Docklands.

“While overall transaction volumes for the Melbourne CBD office market fell from $2.9 billion in 2022 to $376 million in 2023, the entry price-point will ensure Premium grade assets aligned to occupier demand prove strong competition for the Sydney CBD this year.

“Brisbane is also destined to draw investor attention in 2024, after net effective rents across all grades increased by 18.8% over 2023, some of the strongest rental growth since 2007.

“Due to population growth from jobs relevant to the Olympics, and the growing supply and demand imbalance, we forecast Prime average net effective rental growth of around 8.0%% over 2024 and 9.0% over 2025 for the Brisbane CBD market.”

As at January 2024, premium office space only comprised 16.8% of the Brisbane CBD market, compared to the Sydney CBD where it accounts for 27.1%, and the Melbourne CBD where it represents 22.1% of the market.

“Investors are targeting Prime office assets, or those they can reposition in part because the office sector will be at the forefront of the green revolution, capturing capital value uplifts as a result of embedding ESG compliance.” Mr. Woodward said.

Colliers recent Global Investment Outlook Survey revealed that APAC respondents expect ESG aligned offices to command a 14% Premium, and 25% of respondents are currently implementing ESG improvement through capital program disposal and acquisition strategies.