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October 21, 2016

Melbourne’s Southbank Riverside attracted a disproportionally large share of capital in the third quarter of this year with transaction volumes accounting for around half of the AU$1.4 billion (US$1.1 billion) that have been recorded this year so far.

Containing just 4.3 percent of the total CBD stock, and 6.8 percent of prime stock, Southbank Riverside is a small but significant component of the Melbourne office landscape and, according to JLL’s Ben Thatcher, it’s catching the eye of a number of new investors.

“We’re seeing a number of domestic wholesale funds and large-cap REITs selling down for the first time in this tightly held precinct, including long-term holders such as Dexus, Frasers Property and GPT Wholesale Office Fund which has opened the area to a new cohort of investors,” he says.

“These groups are identifying opportunities to undertake tactical disposals, crystalise capital gains and recycle profits into new projects/investment opportunities or reduce gearing while an availability of investment grade product has allowed large international fund managers such as ARA Asset Management and J.P. Morgan to gain exposure to the area’s prosperity over the quarter.”

The REIT sector is also looking for returns in the area with Mirvac constructing a new Melbourne HQ for PwC, securing a superannuation fund ISPT for a 50 percent takeout of the completed product.
So what’s the draw? According to Thatcher, it’s a winning combination of location, changing demand and diverse tenant profile.

Southbank offers CBD access via a pedestrian bridge and connects to the city’s central Flinders Street Station which provides connections to Melbourne’s white collar employees – a disproportionately high number of which live to the East and South of the Melbourne CBD.

The area’s market fundamentals have also been positive, with the precinct recording an average vacancy rate 2.4 percent lower than the greater CBD over the last ten years as investors continue to be drawn to the diverse nature of the tenant profile. IBM, LinkedIn CPA Australia and PwC are all located at Southbank and the strength of the precinct as a corporate location was underlined when PwC committed to a new office in the sector.

“Historically the precinct has benefited from a flight to quality, with tenants vacating older style assets in St Kilda Road for modern product in Southbank Riverside and, given the significant supply anticipated to be withdrawn from St Kilda Road, this trend is likely to continue,” says Thatcher.

As a long-awaited rental upswing finally comes to fruition in Melbourne’s CBD, with prime net effective rents increasing by 5.7 percent over the quarter, new investors in Southbank are poised to benefit as each asset has a WALE of between three and four years.

With the precinct tightly held, and limited potential commercial sites for future development, Southbank remains a strong investment proposition – the challenge will be finding the opportunities.

Ben Thatcher
Research, JLL Australia

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