In 2015 and 2016 the Melbourne South-East Suburbs (S.E.S.) office market will deliver in excess of 100,000 sqm of new product to the market. GPT, Centuria and 360 Capital have all launched funds with mandates to acquire assets in suburban markets. The investment proposition of the Melbourne S.E.S. is relatively positive with investors attracted to:

• A yield spread to the CBD Market that is wider than historical benchmarks.
• Forecast prime gross effective rental increases of averaging 3.4% p.a. over the next seven years (JLL Research).

One challenge for investors in suburban markets is the limited availability of A-grade assets > 8,000 sqm. Of the Australian non-CBD office markets that JLL monitors, Melbourne S.E.S has the most pronounced lack of large buildings as a proportion of Net Lettable Area (NLA).

The Melbourne S.E.S. has ten large A-grade buildings, representing only 10% of total market NLA. Of the nine markets analysed in the table below Melbourne S.E.S. ranks as the second largest on an NLA basis. However it ranks in the bottom three by its count of large buildings and the proportion of space in large buildings. These metrics demonstrate that the Melbourne suburban market has a structural under-supply of larger assets. In the Melbourne @ 5 million planning document released in 2008 (not since superseded), six “Central Activity Districts” were identified, with three of these within the S.E.S. market. The aim of these districts is to provide CBD-type jobs and services, which would suggest further demand for larger contiguous space requirements in the years ahead.

The completion of new developments over 2015 and 2016 will alter the landscape within the Melbourne S.E.S. office market. The number of large buildings over the next two years is set to increase substantially, as well as their representation in total NLA terms (all other things being equal). JLL is tracking 11 projects under construction, of which seven are A-grade and > 8,000 sqm (totaling 105,200 sqm). The diagram below charts the number of large buildings against the percentage of NLA these buildings represent of their markets.

Source: JLL Research

The completion of new product will bring the Melbourne S.E.S. proportion of large A-Grade buildings closer to the numbers seen in the other markets. Assuming no other changes, the number of large A-grade buildings in 2016 overtakes those in Parramatta & Chatswood, and equals the number in North Sydney. However Melbourne S.E.S remains the market with the lowest proportion of space in large buildings.

Smaller secondary assets tend to be too management intensive for institutional investors.  As a result, institutional investment in the Melbourne South-East is low. However the delivery of institutional grade product over 2015/16 increases the incentive to invest in this market. As higher quality assets are progressively offered to the market, we can expect an increasingly diverse buyer pool.

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