Radiant CBD heat warms up fringe office

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Intense competition for CBD office properties in Melbourne and Sydney is creating a surge of activity in fringe office markets.

As yields drop well below 5 per cent in the prestigious CBD markets, deals are being struck at unprecedented levels in fringe markets, according to a new metro office report.

Colliers International's national research director Anneke Thompson, said: "The Sydney and Melbourne city-fringe markets continue to lead the country in terms of rental growth, with each market recording A-grade net effective rental growth of 27 per cent and 24 per cent respectively.

"As CBD prime grade assets in Sydney and Melbourne are routinely achieving sub-5 per cent yields, investors - particularly smaller cap unlisted funds, syndicators and private family offices, offshore investors - are looking to more 'value add' opportunities with a more generous cap rate."

Colliers International's office leasing managing director Simon Hunt said emerging technology groups, which prefer fringe precincts are affecting tenant activity in the Melbourne and Sydney markets.

"In NSW, tenant demand grows for the core metro office markets of North Sydney and Parramatta," Mr Hunt said.

The heat generated in some of those fringe markets, Cremorne in Melbourne, and Parramatta and North Sydney is setting new benchmarks.

The average yield in Sydney's fringe fell 78 basis points in the past year, with Parramatta crunched 111 points to 5.75 per cent.

Meanwhile, Melbourne's average yields compressed a further 63 points with the inner east to 5.75 per cent.

But even tighter yields are being achieved by some developers who started pursuing those "value add" opportunities a couple of years ago.

Point Property Group secured Eastern Health as a tenant for its speculatively built 4000 square metre office project at 110 Church Street in North Richmond.

Leasing was negotiated by Colliers agents Rob Joyes and Michael Darvell at between $375-$385 a square metre with European car dealer Skoda going in on the ground floor.

A deal to sell the just-finished project to a private investor is on the verge of completion at $25.5 million on a 5.25 per cent yield.

It's understood Point Property Group received several offers for the property before selling to a private investor.

And all eyes are on Icon Developments' 600 Church Street deal where a preferred bidder, also understood to be a local investor, is in due diligence to buy an as yet unbuilt 5670 square metre office project.

The fund-through transaction, where the buyer's purchase funds the building's construction, is expected to be struck at between $40 million and $50 million, depending on which of the parties takes the leasing risk.

The deal, negotiated by Dawkins Occhuito and Colliers, is underway pending the outcome of approvals, and design and construction contracts.

Some investors are turning to cities other than Melbourne and Sydney and other regional markets in search of more generous yields in the 6-to-8 per cent range, Ms Thompson said.

Brisbane's inner south offers 6.75 per cent and urban renewal areas such as Geelong can yield up to 8.75 per cent.

Last month, Perth investor Cape Bouvard paid $47 million for the Waterloo Junction hotel and office complex in Newstead on a 7.5 per cent yield.

"There are few markets in Sydney or Melbourne where yields in these ranges can be found," she said.

In Geelong, Impact Investment Group has moved to offload the TAC headquarters for up to $115 million and a local syndicate has also decided to liquidate its long-held investment in two office buildings at 273-275 Ryrie Street.

The two buildings are leased at just over $3 million a year to a range of tenants including Bendigo Bank, Australian Red Cross and Department of Human Services. Sold individually or together, the price is expected to be around $35 million on a yield of around 8.5 per cent. Dawkins Occhiuto and Pat Burke are marketing the parcel.

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This story Radiant CBD heat warms up fringe office first appeared on The Sydney Morning Herald.