Strong demand for office sector

REAL estate investment trusts with an Australian focus are heavily sought after amid suggestions that corporate activity will soon dominate the sector.

By InvestSMART · 14 Sep 2011

By InvestSMART ·
14 Sep 2011

Comments

REAL estate investment trusts with an Australian focus are heavily sought after amid suggestions that corporate activity will soon dominate the sector.

GPT has been keenly bought as some investors suggest a union with Dexus Property. Such a deal would create a formidable diversified Australian-based trust with an exposure to the premium and A-grade office market.

If a merger eventuated there would also be no concern about selling non-core assets, some of which they already co-own, as demand for local office towers with high occupancy is high.

That was shown by the sales in recent weeks of 1 York Street and 20 Martin Place at high prices.

CBRE's regional director, Rob Sewell, said the 20 Martin Place sale generated significant interest from domestic and international investors.

"Domestic superannuation funds and trusts were in a very competitive bidding process alongside local and offshore funds," he said.

GPT is also testing the market with the sale of its half share of the MLC Centre in Martin Place. The asset sales and potential takeovers come as overseas markets continue to falter.

The main theme at the fifth annual Bank of America/Merrill Lynch global real estate conference in New York last week was that heightened concerns about a weaker economic outlook have not yet affected the US market.

The panel of international property analysts and landlords said tenant confidence seems to have declined in the last month, but 2011 continued to be a good year in terms of leasing volumes.

According to Merrill Lynch's property analysts, the panellists said that tenant demand globally was strongest from technology, energy and natural resources, with no signs of a slowdown in these sectors.

The conference heard that risks of contraction in demand from big bank lay-off plans could be offset by expansion from smaller banks and investment firms.

In the US, good leasing volumes continue in New York, San Francisco and Boston, and there is strong interest in London. Demand is also strong in Sydney and Melbourne, where real rental growth continues.

The conference concluded that the macro economy in the US remains fragile with problems in housing, unemployment, consumer and business confidence, and leverage.

Industrial

Boom in online sales drives warehouse demand Next page

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What’s driving strong demand for the Australian office sector right now?

Demand is being driven by high-occupancy premium and A‑grade office towers, strong leasing volumes in Sydney and Melbourne, and intense interest from both domestic and international investors. Recent high‑price sales such as 1 York Street and 20 Martin Place highlight investor appetite for well‑located office assets.

Why are office-focused REITs (like GPT) attracting heavy buying from investors?

Investors are keen on Australian-focused REITs because corporate activity (asset sales and potential mergers) could create larger, diversified trusts with big exposure to premium office markets. In GPT’s case, market talk of a union with Dexus and active testing of assets (for example, GPT’s half share of the MLC Centre) has increased interest.

What would a GPT and Dexus merger mean for investors in office REITs?

According to coverage in the article, a merger between GPT and Dexus would create a sizeable, diversified Australian‑based trust with strong exposure to premium and A‑grade offices. The combined entity would likely have flexibility to sell non‑core assets and benefit from strong demand for high‑occupancy towers.

What does the sale of 20 Martin Place tell everyday investors about office asset values?

The 20 Martin Place sale drew significant domestic and international interest and competitive bidding — including from superannuation funds — and sold at a high price. That suggests premiums can be paid for well‑located, high‑occupancy office buildings, supporting robust valuations in that segment.

How is global tenant demand changing and which sectors are boosting office leasing?

Property analysts at the Bank of America/Merrill Lynch conference reported the strongest tenant demand has come from technology, energy and natural resources sectors. There were no signs of a slowdown in leasing from these industries, which has helped sustain leasing volumes.

Is the US office market showing signs of weakness because of the wider economic outlook?

Panelists noted that while tenant confidence had dipped recently, the US market had not yet been materially affected and 2011 remained strong for leasing volumes in cities like New York, San Francisco and Boston. However, they also warned the US macro economy remained fragile, with risks from housing, unemployment, confidence and leverage.

What key signs should investors watch for when evaluating Australian office REITs?

Watch for corporate activity (takeovers and mergers), major asset sales (for example stakes in landmark buildings), occupancy and rental growth in Sydney and Melbourne, tenant mix (technology, energy and natural resources), and levels of domestic versus offshore investor interest — all factors highlighted in the article.

Is demand for industrial warehouses improving because of online sales?

Yes. The article notes a boom in online sales is driving stronger demand for warehouse and industrial space, signalling growing interest in logistics assets alongside traditional office markets.