CAPITAL TRANSACTIONS

According to James Girvan, Director of Capital Transactions at Savills Australia, the post-COVID era has significantly halted the trading of Melbourne’s institutional grade office assets which has forced investors to take a ‘wait and see” approach.

“Whilst direct vacancy is hitting over 10% (up from 3.2% pre-COVID), Melbourne still remains a top priority for investors seeking rental growth.  Furthermore, effective rental growth is the biggest concern for investors over the next 12-24 months, with direct and indirect (sub-lease) vacancy set to increase. But looking at 2022 and beyond, we expect vacancy to “normalise” to ~7% and incentives to come back to 25%+ for Prime and A Grade stock.

Mr Girvan said the resilience of the Melbourne market has been proven with the post-COVID era sales of 525 Collins St (Rialto) (50%) and 222 Exhibition St (50%) both to GIC, as well as 452 Flinders St sold to Deka; all Prime/A Grade buildings sold at cap rates reflecting sub-5.00%.

“For the secondary stock, the sales of 350 Queen St and 505 Little Collins St also reflected very strong pricing with significant local and offshore interest.

“Investor confidence will continue throughout 2021 with assets previously earmarked for sell down in 2020 now being pushed to campaigns commencing in 2021,” he continued.

CBD & METROPOLITAN SALES

Clinton Baxter, State Director of CBD & Metropolitan Sales at Savills Australia, said assuming effective COVID vaccines become a reality in 2021, then we expect a post-pandemic surge in property values and sale activity throughout 2021 driven by ultra-low interest rates and strong completion from buyers seeking to secure high quality assets.  

“With a huge level of wealth sitting on the sidelines throughout 2020 waiting for the right time to re-enter the market we are likely to experience a rush into the market particularly as vaccines begin being circulated throughout the community.

“Investors are likely to have a newfound sense of pandemic risk and how that affects any particular asset so will be willing to continue to pay a premium for those assets that have proven the most resilient throughout 2020 such as non-discretionary retail, medical, petrol stations, industrial and childcare.

“The CBD markets will bounce back in a very pronounced way, especially as office workers return and international travel resumes – expect a 20%+ surge in values in the next year or two driven by a flood of off-shore capital into Australia as one of the shining lights of pandemic response globally,” he said.

RETAIL INVESTMENTS

According to Rick Silberman, Director of Retail Investments at Savills Australia, in 2020, we saw a resurgence towards investment grade stock that is heavily weighted towards ‘defensive’ style assets.

The pandemic event has arguably strengthened the market for freestanding supermarket assets, by driving interest rates lower, exacerbating a low return environment, and highlighting the low-risk virtues of long leased property to “essential service” tenants. Bunnings, Woolworths and Coles remain the most desired retail investment tenants.

“Throughout 2020, limited transactions and scarcity of stock have been the common theme in the market. To highlight this, we note that 37 freestanding Coles & Woolworths supermarkets and 4 Dan Murphy’s stores transacted across 2018 and 2019. By way of comparison, only two freestanding supermarkets have sold in 2020 to date.”

Freestanding Coles, Woolworths & Bunnings and neighbourhood shopping centres anchored by Coles or Woolworths continue to be the most tightly held and sought after of all retail asset classes.

“We expect 2021 is going to see the numbers return to 2018/19 volumes with confidence returning, a further interest rate drop and the worst of the pandemic seemingly in the rear view mirror.

“There has been lot of capital from both private and institutional investors largely sitting on the sidelines patiently waiting for the right time to strike and 2021 may be the perfect storm”.

INDUSTRIAL & LOGISTICS

Lynton Williams, Director Industrial and Logistics, VIC at Savills Australia said despite the COVID related shutdowns throughout the year, demand for industrial property has remained particularly strong.

“Buying demand from Owner Occupiers and Investors is pushing capital values higher and the underlying land values are increasing as demand exceeds supply. For example, land values in Dandenong for an allotment size of 2000sq m has reached circa $600 per square metre. It was $200 per square metre only five or so years ago.

“Leasing demand has also been reasonably strong although this is yet to flow through to higher rent levels. Design & Construct prelease deals are being done at face rents of $90 -$95/sq m but with 20–28% incentive levels, which we believe will come back somewhat over the next year or so, given the ever reducing supply of industrial land. We go into 2021 with the market looking strong in all aspects,” he continued.

SUPPLY CHAIN

According to Bob Quirk, Director of Supply Chain at Savills Australia, 2020 has seen a rollercoaster of challenges but the outlook for 2021 is bright.  

“In 2020, international as well as domestic supply chains were disrupted.  And while Australia is now enjoying a new ‘COVID normal’, most of the rest of the world suffers ‘another wave’ causing supply issues.  

“COVID accelerated existing trends of switching to ecommerce, same-day deliveries and the need for optimally located facilities, but it also meant uncertainty to supply chain volumes.  Port industrial action plus delays to imports meant we had the perfect storm heading into Christmas. Supply Chains have been challenged to adapt and they have.  

“The strength of the back end of 2020 sees 2021 looking strong.  COVID vaccines, economic confidence, built up demand from residential housing and capital projects fuels demand.  The need for effective and efficient supply chains remains and there is capital sitting there ready to assist.  Deferred decisions from 2020 are now back on the agenda and we are poised for a cracking 2021.”

OFFICE LEASING

According to Mark Rasmussen, State Director - VIC Office Leasing at Savills Australia, Australia’s biggest office market - Melbourne (with 5 million sq m approx..) roared back to life in November with tenants looking to catch up after the lockdown and reposition for the post COVID era. Whilst there have clearly been some casualties on both the Landlord and Tenant sides, the general market sentiment is positive. The solid activity is due to tenant requirements expanding, contracting and as well as those seeking to reconfigure.

“The framework for 2021 is being set by 11 new Melbourne office buildings delivering close to 450,000sq m to the market in the form of fully leased, premium grade and A grade space. The majority of the subsequent backfill is high quality Prime grade accommodation. COVID tenancy repositioning has resulted in 120,000sq m approx. of prime fitted space now being offered for sublease. Vacancy rates have risen from 3.2 to in excess of 10%. Incentives have increased (20% up) and there is downward pressure on rents (10% down). By comparison to other Australian markets, Melbourne appears to be maintaining its historically conservative position.

“Corporate Australia has developed world class office workplace practices and generally has the luxury of occupying highly efficient staff friendly accommodation at highly competitive prices. Many forward thinking corporations have successfully used work from home (WFM) practices now for some years. Whilst the cost savings are marginal WFM can suit a proportion of the workforce varying form industry to industry.

“An overreaction to WFM practices by some Tenants is likely to cause business issues including lack of innovation via staff collaboration, lack of team cohesion, higher staff turnover, reduced in-house training and mentoring not to mention diluting the valuable social and team aspects of the traditional 2019 workplace. Loss of workplace culture due to an overzealous WFM path may cost businesses far more than the office property cost savings.

“We forecast 2021 will be characterised by tenants’ flight to quality, steady new demand, an appreciation of the established successful workplace practices. Vacancy rates will steadily move down, and office rents are likely to hold at current levels”.