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While foreign investors continue to be attracted to all property sectors, office property is seeing a particularly high level of interest, driving up asset valuations in some locations, says Mark Lumby, head of property funds – retail at Australian Unity Real Estate Investment.

But outside of the traditional CBD markets, there are good opportunities for investors seeking an investment in office property, he says.

Mark Lumby

“Over the last five years, foreign investors’ appetite for Australian office property has gone from being a relatively small component of their overall property allocation in Australia, to being by far the largest sector – almost three times bigger than retail property, which was historically the most attractive.

“More than 60 percent of foreign capital going into Australian property has been directed to office investments since 2005. In addition, a number of overseas residential developers are buying old office buildings and converting them to residential properties.

“On top of this, AREITs are now trading at a premium to their net asset value once again – eight percent as at 31 August 2014. Coupled with strong interest from private syndicates in a low interest rate environment, these factors are all creating competitive tension and increasing asset valuations in some locations.

“This has resulted in high transaction volumes and pricing for office property in some CBD locations to the point where investment returns are too low for some investors, such as institutional investors, to meet their investment objectives. Typically, these return objectives are CPI plus five percent.

“As a result, these investors are now turning to the ‘secondary’ office market, such as in Sydney and Melbourne fringe areas, which contain excellent investment opportunities.

“For example, Parramatta in Sydney, and St Kilda in Melbourne, have both been delivering good stable returns for investors.  We have seen a number of superannuation funds investing in these areas as they offer the potential to better achieve the kinds of property returns they require.”

Mr Lumby said that the stable returns for investors in Sydney and Melbourne office property are likely to continue for some time.

“There continues to be reasonable leasing demand for office space in these cities.  Even though the development pipeline is strong – for example, the Barangaroo development in Sydney’s CBD which, on completion, will represent approximately five percent of Sydney’s CBD office space – there are a number of office buildings being converted to residential or hotel use which, when coupled with the moderate levels of tenant demand, should keep a lid on vacancies.

“It’s a different story in Perth and Brisbane, however.  As the mining industry transitions from the construction to the production phase, many big mining corporations are reducing their office space requirements in these cities.  At the same time, there are some major new developments coming online, such as Kings Square and Elizabeth Quay in Perth.

“This is creating a huge amount of supply on the market, and there simply isn’t the demand over the short or medium term.  As a result, we expect vacancies to increase in the short-term in both Perth and Brisbane from their current levels of 11.8 percent and 14.7 percent respectively,” Mr Lumby said.

Another positive sign for investors in office property is that business conditions have been improving over the course of the year.

“Office tenant demand tends to lag business conditions by about one year.  At a reading of +4 index points, the latest NAB Monthly Business Survey¹ shows business conditions at close to the highest they have been for four years, so the outlook is pointing towards improved tenant demand.

“And when focusing on secondary office properties, a comparison of industry conditions for SMEs and larger sized firms, taken from NAB’s Quarterly Business Survey², suggests that smaller firms are performing better than their larger counterparts in a number of industries – as well as reporting better conditions overall.  This evidence supports the low vacancy rate in many suburban office markets like Parramatta where the vacancy rate is 6.7 percent compared to Sydney’s CBD which is at 8.4 percent,” he said.

Australian Unity Investments is the funds management are of Australian Unity, a national healthcare, financial services and retirement living organisation that has been operating for more than 170 years.

Australian Unity Investments offers a range of investment funds in domestic and international equities, fixed interest, mortgages and property. Its investment approach is to use its established in-house expertise in property and mortgages while also forming joint ventures and strategic alliances with boutique asset managers.

The Australian Unity Real Estate Investment business has over $1.6 billion in funds under management (as at 30 June 2014). Its unlisted property funds and syndicates own more than 50 properties in the healthcare, retail and commercial sectors, in Victoria, New South Wales, Queensland, Australian Capital Territory, Western Australia and South Australia.

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For more information please contact:

Mark Lumby – Phone: 03 8682 4548