The Experts

A tale of two cities

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“Melbourne is a sad, obscure backwater of no international relevance, whereas Sydney is a place of sun and beaches.” On the other hand, “sun and beauty rarely coexist with intelligence, and Melbourne is considerably smarter. These comments, made in the Sydney Morning Herald, sum up the kind of rivalry that has long existed between Australia’s two major cities. But when it comes to property markets, and commercial property markets in particular, is one market a better bet for investors

Jason Huljich, CEO of Centuria Property Funds, talks Sydney and Melbourne, the defining features of both, and whether investors should set their sights firmly north or south.

With recent research from Savills Australia suggesting that trusts and funds have invested 66% of the $1.55 billion spent on Melbourne commercial property, it is interesting to take a look at why this might be.

The answer is that while the figure may be impressive, the truth is that listed property trusts, or AREITs are currently making their presence felt in both Sydney and Melbourne in a way that hasn’t been seen since before the global financial crisis.  

AREITs have traditionally been the largest owners and purchasers in the market, but following the GFC, many found themselves trading at a discount to net tangible asset backing, needing to re-capitalise, and locked out of the market.  

Over the past 12-18 months, however, their fortunes have changed. Many AREITs are now priced at or above NTA and as a result, many are actively moving back into the market, both in Sydney and in Melbourne.

As a result, offshore buyers, who have had the market to themselves in some cases, particularly when it came to their property assets of choice, Premium grade office stock, are now up against some stiff competition from AREITS looking to invest.

So are there significant differences between Sydney and Melbourne?  

One aspect of the two markets which does differ is the structure of the ownership of commercial property assets. In Melbourne, a much larger proportion of property stock is owned by families compared with Sydney, where institutional investors are bigger players.

Because families and family interests tend to hold onto properties for longer, there is less ‘churn’, or turnover rate on property assets in Melbourne, which in turn means that less stock is available for purchase.

In terms of tenant profiles in the two cities, Sydney has typically been headquarters for financial services firms, whereas Melbourne has been home to the back office functions of major corporations. Given that space in Melbourne is typically half the cost of space in Sydney, this make sense.

Mining giants BHP Billiton and Rio Tinto, for example, both house their back offices in Melbourne. This means that Melbourne office stock is arguably more sensitive to the downturn in the mining sector, but the effect is unlikely to be significant.

Regulatory and legislative requirements are largely consistent across the two markets, although there is no mortgage stamp duty in Victoria. This cost is not generally significant in investment terms however.

In terms of new stock coming into the market, it is interesting to compare the effect of two major developments. In Melbourne, the Docklands development added nearly 1 million square metres of space to a CBD of approximately 3.65 million square metres.  Barangaroo will add 300,000 square metres to a CBD of approximately 4.9 million square metres.

On the face of it, it would appear that the Docklands development could have had a seriously detrimental effect on the ‘traditional’ Melbourne CBD, and the Melbourne commercial property market in general, given its size and scope.  However, the space has integrated well. With the Australian Taxation Office, ANZ, NAB and Myer, among others, choosing to locate their head offices there, as well as over 4,800 dwellings and 100 plus cafes and restaurants, Docklands has provided a boost for the state economy.

Although it has had the effect of extending the ‘traditional’ CBD area around Collins Street, which has affected rents slightly, in general Docklands has appealed to different users compared with those seeking space in the traditional CBD locations.

In addition, the kinds of features which new developments offer have also proved a strong lure. Larger, more flexible floor plates, better amenities and competitive rental levels (including incentives) have all combined to draw tenants to the Docklands development.

When it comes to Sydney, the only comparable development, Barangaroo, will be a much smaller proportion of the CBD commercial property market. With pre-commitments from Westpac, KPMG and Lend Lease of up to 120,000 square metres, it is unlikely that the space will materially affect office markets when it comes on line fully in 2015.

Overall, when it comes to the things that tenants and investors alike are looking for in commercial property, it’s fair to say that Sydney and Melbourne are more alike than they are different. Location is always important, as are the amenities on offer if you are a tenant.  It’s simply a question of doing the due diligence and making sure the numbers stack up.

Published: Friday, November 22, 2013

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