Rising business confidence and low debt costs are likely to compress yields for core office assets by 100 basis points over the next three years, Colliers International forecasts.
A combination of cheap debt, a significant surplus of capital looking to invest, rising business confidence and a lift in the leasing market could push yields below the level set in the property cycle's last peak in 2007, Colliers estimates.
The National Australia Bank's latest confidence survey released Tuesday shows business confidence fell back in October after improving the previous two months.
"Businesses may have reassessed their expectations about future activity in the changed political environment given the continued weakness in actual business conditions," NAB said. But confidence was higher overall than the well below-average levels seen over the previous three years.
Colliers national director capital markets Nick Rathgeber said business confidence had moved from negative to positive territory this year. Analysis of property cycles over the past two decades shows similar sharp changes in sentiment occurred only three other times.
After each spike in confidence debt costs climbed and yields contracted. "Looking at trends within previous cycles, yields look like they should trough in approximately mid-2016, nine years after the last boom in 2007. However, it would not surprise if the cycle accelerated and conditions peak in 2015," Mr Rathgeber said.
Sentiment among core office investors had lifted this year, he said. "We think there's strong potential for there to a be a few years of yields coming down and the cost of debt going up similar to what occurred between 2001 and 2006," Mr Rathgeber said.
If business confidence continues to improve Melbourne's prime yields were expected to fall below the previous cycle's 6 per cent trough to about 5.5 per cent.
Sydney's yields, typically 25 to 50 basis points lower than Melbourne's, would approach 5 per cent. But secondary property yields would see the greatest degree of compression, particularly closer to mid-2016, he said.
Colliers predicts they will contract by 200 basis points.
"It's hard to predict a boom but there's certainly going to be a period of yield compression," he said.
Colliers estimates $23 billion of domestic and offshore money is looking to invest in core Australian CBD office assets. That money was likely to push yields below the last cycle's trough as it could accept lower yields than domestic investors.