Chart of the Day: See how Singapore developers are on an investment binge in office space in the land down under

Prime assets in Melbourne and Sydney are preferred.

The office segment is experiencing a period of strong investment demand, which is driving cap rate compression within major cities.

A report by CIMB reveals that prime assets in key locations such as Melbourne and Sydney were preferred over others. The increased investment demand was driven by higher absolute yields, a transparent tax and legal framework within Australia and lastly, potential conversion and redevelopment potential.

Looking ahead, JLL expects forward rental growth to firm over 2015-17, particularly in Melbourne, Adelaide and Sydney, with historically low supply and supportive demand. However, Perth could still see a period of digestion owing to high supply and patchy demand.

CIMB’s interviews with one office A-REIT and 3 diversified property companies in Australia, concur with the view above.

The office segment has enjoyed strong investment demand which had led to cap rate compression while some older office buildings in Sydney are being converted or has potential to be changed into residential developments and this has, to a certain extent, sparked relocation demand. Based on current market observations, they indicate that the Perth and Brisbane rental markets are weaker than in Sydney and Melbourne.

Outlook for the office rental market in various cities is likely to reflect the present trend. In terms of cap rates, most expect compression of a further 50bp from hereon. However, in terms of operational traction, these local players mentioned, that with a lack of a domestic management platform, foreign buyers may have limited capability or difficulty in adding value to their assets.