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June 1, 2016

With the real estate space dominated by government departments and public servants, buying an office building in Australia’s Canberra is analogous to buying an Australian government bond – on a higher yield, says JLL.

Adding to the appeal of investing in Canberra, the market is experiencing an up surge in foreign interest, assisted by the implementation of the first regularly scheduled international flights to Australia’s capital from Singapore, to be operated by Singapore Airlines from September 2016.

In Canberra, the Commonwealth Government contributes the largest percentage of Gross State Product and is the single largest employer. The city’s main industry is public administration, and the headquarters of many Australian Public Service agencies are located here.

Compared to the national averages, the unemployment rate is lower and the average income higher; tertiary education levels are superior and the population is younger. The office market in Canberra benefits from strong tenant covenants and attractive 10-year government leases.

“Canberra ranks as the third largest prime grade office market in Australia with the Federal and ACT Governments as major occupiers of stock ensuring certainty of income,” says Michael Heather, Head of Sales and Investment at JLL Canberra.

“Investing in Commonwealth leased assets is akin to putting money in a government bond, which provides investors with a predictable cash flow paid on a periodic basis. The benefits of Canberra real estate, like sovereign bonds, are the low investment risk, regular income and liquidity of assets.” adds Heather.

In 2015, real estate sales volumes in the city were recorded in excess of AU$ 530 million, which is the strongest year ever recorded by JLL Research.

“The continued interest in the market will see greater bidder competition and continued capital value growth looking into 2016 and beyond,” says Heather.

In the first three months of this year, net absorption reached 13,700 sqm. The prime vacancy rate currently stands at 7.4 percent and is the second tightest prime grade vacancy rate across monitored CBD office markets in the country, second only to the Sydney CBD.

JLL forecasts prime net effective rents will increase by 3.2 percent in 2016 and by an average of 5.9 percent per annum between 2016 and 2019.

Over the medium term the projection for capital value growth in Canberra is 16.5 percent between 2015 and 2020.

The start of flights by Singapore Airlines to Canberra in September, – the first air link to Asia – is expected to bring a wave of new investors.

Institutional investors are reassessing Canberra as a desirable investment market, due its strong leasing covenants, long weighted average lease expiries (“WALEs”), and a positive yield spread to Sydney and Melbourne.

“Robust investor demand, a wide spread between office yields and the risk-free rate, and the potential for effective rental growth should exert downward pressure on prime equivalent yields in 2016,” says Heather.

Currently, Canberra has several development sites, both greenfield and brownfield, around the city awaiting pre-commitment.

Taking into account current demand, a number of developers are currently reviewing their master plans. These projects are expected to become mixed-use developments, according to Heather.

Recent yield compression in both Sydney and Melbourne has seen the yield spread between Canberra and other core CBD office markets widen considerably compared to historical standards.

“While overseas interests in Sydney and Melbourne remain strong, the leasing markets in these cities tend to be more correlated with the wider economy,” says Heather. “In Canberra, the government is less likely to cut staff in a downturn, compared with private companies. As such Canberra offers a strong value proposition and an attractive option for investors.”

Take a look at our latest Canberra investment opportunity.

Michael Heather
Head of Sales and Investment, JLL, Canberra.

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