From CBRE ResearchThis softening has been heavily influenced by...

From CBRE Research

This softening has been heavily influenced by the sale this month of 15 William Street in Melbourne at a reported yield of 8.75%.

“This level is significantly above analysts’ attempts to estimate where yields have been at, since sales activity ground to a halt early in 2008,” Mr Stanley said.

“The June quarter 2009 Australian weighted average Prime CBD office yield is close to 8.0%. This suggests the sales-driven yield is about 40 basis points “above and ahead” of the analysts call, or the implied yield which has been adopted given the lack of sales data.”

Mr Stanley said this gap would inevitably close as analysts met the market and adjusted their pricing and valuation models to reflect the current market activity

“So far in this cycle, the adjustments made to implied yield have removed, on paper, 20% from prime office capital values,” Mr Stanley said.

“This extra 40 basis point softening to meet the market could eventually take another 10% from capital values, on average, across the Australian prime office sector, as valuations flow through the market.

The six investment sales plotted by CBRE are the Edmund Barton Centre, Industry House and 62 Northbourne Avenue, all in Canberra; 15 William Street and 1 Spring Street in Melbourne; and the Grenfell Centre in Adelaide. All were sold to either European or private investors.

Mr Sewell said the transactions highlighted a clear shift in the market following a stagnant 2008, during which investment sales dipped by 60%. During that period an estimated AU$30 billion of assets was theoretically available for purchase, however most vendors remained reluctant to deal at discounts to book value.

“Ironically, many of the investors who were researching the market weren’t ready to buy at the time when the LPTs were willing to deal, which was from Q3 in 2008 to Q1 2009,” Mr Sewell said.

“We’ve now reached an inflection point. Major sales are now occurring and at the same time stock levels are shrinking. It’s our firm belief 2009 will be characterised by a significant reduction in the number of assets being offered to the market, particularly prime assets, due to the recent capital raisings which have been undertaken by many of the larger LPTs.”

Mr Sewell said upcoming market opportunities were likely to be driven by several factors. Sales by distressed vendors were likely to occur as these owners were compelled to reduce debt ahead of loan expiries. Additionally, a select number of wholesale funds were expected to sell assets to meet redemptions or to fund capex programs.

At the top end of the market, for assets priced over $100 million, Mr Sewell said the predominant target would continue to be offshore investors.

“We are also fielding interest from a number of local investors, predominantly large industry funds who were previously invested in wholesale property fund but who now wish to invest directly in prime office and retail assets,” Mr Sewell said.

Cashed up private investors are meanwhile expected to drive activity in the sub $100 million bracket, particularly for property with relatively secure income streams.

“We are seeing new investors entering the market and we anticipate the return of syndicates to purchase property in light of the recent softening in investment yields,” Mr Sewell said.

“We are also seeing good interest flowing from Asia for well priced CBD assets.”