Melbourne has led the charge for yield compressions globally across the past three years, a new report has found.

In Impacts, Savills explores the link between office yields and borrowing and concludes that the relationship has become more tenuous as investors’ profiles have changed and fewer investments have been predicated on finance from bank borrowing. 

According to Savills, a rise in interest rates in any domain is unlikely to result in a corresponding rise in prime office yields, so they are likely to remain stable or continue to fall in many markets. 

At a glance:

• Savills' Impact report indicates Melbourne is leading the charge when it comes to yield compressions across key CBD markets globally, with prime yields falling 174 basis points since 2015.
• The report forecasts that the Paris (3.0 per cent) and Amsterdam (3.5 per cent) prime CBD office markets could see market yields harden to under 3.0 per cent by the end of 2019.
• CBD prime office market yields are now sub-3.0 per cent in Hong Kong (2.43 per cent), Frankfurt (2.9 per cent), Tokyo (2.9 per cent) and Berlin (2.9 per cent), in a reflection of the new benchmarks being set globally. 

The report indicates Melbourne was on top when it came to the level of yield compression across key CBD markets globally, with prime yields falling 174 basis point since 2015.

The Victorian city was followed by Beijing (-132 basis points) and Berlin (-120 basis points). 

Savills Australia’s CEO, Paul Craig, said that while Australian cities were still off the 3.0 per cent mark hit by other CBD markets worldwide, “it would be prudent to assume that yields Down Under will fall in a similar trend in the next five years”. 

“This is even more so the case given the Melbourne CBD’s status as a regional gateway city and the Sydney CBD’s status as a global gateway city,” he said.

CBD prime office market yields are now sub-3.0 per cent in Hong Kong (2.43 per cent), Frankfurt (2.9 per cent), Tokyo (2.9 per cent) and Berlin (2.9 per cent), in a reflection of the new benchmarks being set globally.

Savills' report forecasts that the Paris (3.0 per cent) and Amsterdam (3.5 per cent) prime CBD office markets could see market yields harden to under 3.0 per cent by the end of 2019.

 Savills Australia’s director for Capital Transactions in Victoria, James Girvan, said growing investor demand from both foreign and domestic investors in Melbourne had driven yields down to record low levels.

“Investors are drawn to the Victorian capital, not only because of strong demand drivers and nation-leading economic indicators," he said.

“The risk-adjusted return for Melbourne CBD remains among the highest recorded across all office markets globally (according to latest available data from the MSCI IPD).”

As a result of record low interest rates, and thus record-low long-term bond yields, the yield premium throughout the 10-year bond rate remained elevated at 305 basis points, according to Savills data in March 2019.

Savills Australia’s director for Research & Consultancy, Shrabastee Mallik, said more investors were recognising Australia's investment potential.

“We are not only seeing our peers abandoning tightening monetary policies globally but domestically, there is also a growing consensus that the RBA will likely bring the cash rate down further this year," she said.

“We are seeing swap markets pricing interest-rate cuts for the remainder of 2019, which will add more downward pressure on 10-year bond rates, keeping the yield premium elevated and in favour of commercial property.

“Based on global data, yields in Australia remain elevated, compared to comparable investment destinations, providing the impetus for foreign investors to invest in Australian office markets."

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