Melbourne – Property & Economic Update

Melbourne is the second-most populous city in Australia, with about 4.7 million residents. According to the Economist Intelligence Unit, for seven consecutive years to 2017, Melbourne has been ranked as the world’s most liveable city. Melbourne has a highly diversified economy with particular strengths in finance, manufacturing, research, IT, education, logistics, transportation and tourism. The city is home to Australia’s largest and busiest seaport, which handles more than $75 billion in trade every year and 39% of the nation’s container trade. Melbourne is Australia’s leading centre for superannuation funds, with 40% of the total, including the $109 billion Federal Government Future Fund.


Victoria’s population growth is approaching record-high levels with the state’s population growing by 147,400 in the year to September 2017, accounting for 37% of Australia’s total population growth. Victoria’s nation-leading population growth has underpinned economic growth for the state in recent years. Over 2017, Victoria’s state final demand increased by 3.0%, second only to South Australia. Victoria’s strong population growth has also supported retail trade, which grew 1.8% in the December quarter, the second highest growth rate among the states. Global economic conditions continue to improve, supporting the outlook for Victoria’s economy, which remains strong given its diverse industry base. Victoria’s record infrastructure program is also expected to generate further employment in the construction sector.

Victoria continued to grow the fastest of all Australian states, with population increasing by almost 150,000 people over the year.


25_Initial Yields & IRRs – melbourne

Office Market

The Melbourne CBD office market experienced the largest decrease in vacancy over the second half of 2017 and now boasts the lowest vacancy rate across all Australian CBDs. The Melbourne CBD office market decreased to 4.6% as at January 2018, its lowest vacancy rate since July 2008. The CBD office market recorded 74,800 square metres of net absorption over 2017, more than any other Australian office market, and was the 15th consecutive calendar year of positive net tenant demand. As a result of vacancy falling to its lowest rate in nearly 10 years, prime CBD effective rents have reached unprecedented levels, growing 15% over 2017. Future supply is on par with historic averages over the next two years, with 240,500 square metres to be brought to market in 2018 and 2019. Boosted by several significant fund-through transactions, investment activity in 2017 within the Melbourne CBD office market surpassed $3.8 billion, its highest level on record. Investment activity by asset type for Melbourne can be found in Exhibit 24. The 1Q 2018 Situs RERC/UPA survey results reveal that the average unlevered yield for prime Melbourne CBD assets is 4.75% with an average IRR of 6.5% (see Exhibit 25 for initial yields and IRRs by property type).

Outside of the CBD, the Southbank office market recorded its highest level of tenant demand in seven years; however, high levels of supply pushed vacancy up. With further office properties withdrawn for residential development, vacancy in the St Kilda Road office market fell to its lowest level since July 2008. Looking forward, prime rents are forecast to grow solidly over 2018 underpinned by the current low vacancy, lack of new supply and additional stock withdrawn. With prime Melbourne CBD office assets transacting below 5% yields, investors – particularly smaller unlisted funds, private investors and offshore groups – are looking to more ‘value add’ opportunities with higher cap rates in non-CBD office markets. Intense competition for CBD office properties in Melbourne created a surge of activity in non-CBD office markets. Investment activity across Melbourne’s non-CBD office markets totalled $1.7 billion in 2017, surpassing the $1.0 billion transacted in 2016. Responses from the 1Q 2018 Situs RERC/UPA survey reveal that the average unlevered yield for prime Melbourne non-CBD office assets is 5.5% (down from 5.98% as at January 2017 survey) with an average IRR of 7.0% (down from 9.0% as at the January 2017 survey).

Industrial Market

The Melbourne industrial market has been long profiting from the strength of the Port of Melbourne. Major transport infrastructure projects currently under development and in the pipeline are further expected to improve connectivity within the industrial precincts while expanding capacity in Melbourne’s transport network. Melbourne’s position as Australia’s largest industrial city is expected to be augmented by these projects. While the recent closures of car manufactures will impact the Melbourne industrial market, the food export sector is expected to offset these closures over the coming years. Victoria accounted for 25% of Australian food exports over 2016/17. New supply levels for the Melbourne industrial market in 2017 were their lowest since 2013. New construction was led by tenant pre-commitments seeking bespoke facilities with speculative development limited. Lower stock levels are likely to provide a boost to rental growth through reduction of incentives over 2018. Over 2017, $1.75 billion was transacted across the Melbourne industrial market, lower than the $1.95 billion transacted in 2016. According to the 1Q 2018 Situs RERC/UPA survey results, the average unlevered yield for prime Melbourne industrial assets is 5.75% with an average IRR of 7.0%.

Retail Market

Victoria’s favourable economic fundamentals continue to support the retail market. State final demand increased 4.4% over 2017, 200 basis points above the Australian GDP. Victoria’s population grew 2.4% to 6.35 million people in the 12 months to September 2017. This strong population growth will continue to support retail spending. Victoria’s retail sales turnover grew by 4.5% over 2017, the highest rate across Australia. According to the Australian Bureau of Statistics, retail trade growth in Victoria was led by sales of cosmetics, which grew by 15.7% over the year and cafés & restaurants (6.0%). Over 2017, retail transactions in Victoria totalled $2.0 billion, boosted by GPT’s purchase of a 25% share of the Highpoint shopping centre. The transaction was struck on a record 4.2 % yield, the lowest ever paid in the history of Australia shopping centre transactions, indicating the high prices institutional investors are willing to pay for exposure in dominant shopping centres. The 1Q 2018 Situs RERC/UPA survey results reveal that the average unlevered yield for Melbourne Super & Major Regional Shopping Centre assets is 5.15% with an average IRR of 6.75%. Responses from the 1Q 2018 Situs RERC/UPA survey reveal that the average unlevered yield for prime Melbourne large-format retail assets is 6.5% with an average IRR of 8.25%.

The Highpoint shopping centre transaction was struckon a record 4.2% yield, the lowest ever paid in the history ofAustralia shopping centre transactions.

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