Rate cut likely to extend bull run in strata property

Private developer MAB Corporation has sold a key strata office component in its Escala project in Docklands for $8.1 million as the long bull run for strata assets looks to be extended with the Reserve Bank lowering official interest rates.

Publishing firm Prime Creative Media will move from its Buckhurst Street South Melbourne headquarters to the waterside suburb after striking an off-the-plan deal for the bespoke space’s flexible layouts at a rate around $7000 per square metre.

This week’s official rate cut by 25 basis points to a historic low of 1 per cent is likely to make the yield differential from commercial property a more attractive proposition for investors seeking higher returns.

MAB general manager residential David Allt-Graham said MAB will start construction on the $130 million Escala tower late this year and finish in 2022.

The majority of the building is residential. More than 75 per cent of its apartments, which feature a unique interlocking loft design, had pre-sold over the past 12 months despite difficult market conditions, he said.

“We are seeing NewQuay attracting tenants who come to the Harbour for lifestyle and unrivalled access to the airport and road networks. We are thinking beyond ubiquitous ‘grey’ office space,” Mr Allt-Graham said.

John Murphy, the chief executive of the business-to-business media firm, said the amenity in the Escala building – including a rooftop garden with alfresco dining spaces, gym, heated indoor swimming pool and spa – was a drawcard in the purchase.

The deal was negotiated by Colliers International’s Chris Ling, Anthony Kirwan and Martin Leong.

Mr Ling said low interest rates, tight office vacancy rates and rising rents were making strata commercially viable for both investors and owner occupiers, particularly with returns between 5 and 7 per cent.

“With a lack of supply in the market we expect this trend to continue throughout the remainder of 2019,” he said.

About $32.7 million of strata office stock has sold in the CBD so far this year, less than the $86.4 million in total sold last year, Colliers figures show.

Nevertheless the average per square metre value has shot up from an average of $8200 per sq m last year to $10,600 this year, revealing the underlying demand for an asset class once considered the poor cousin of city office space.

Docklands strata values are generally below the average of the CBD’s, but the Escala space sold well above average pricing in NewQuay and Docklands.

The transformation of the strata sector over a five-year period has mirrored the booming capital values of Melbourne’s freehold buildings.

Yields for city and city-fringe strata property five years ago were between 8 and 12 per cent.

Now offices are achieving an average yield of 4.95 per cent.

MAB’s office plans in NewQuay extend beyond the Escala building. On the northern side of Docklands Drive at No.376, the developer is marketing for pre-lease 50,000sq m of premium office space across four buildings covering a 1 hectare site.

The group is also proposing 1200 apartments across five residential buildings flanking a new 4000sq m linear park linking NewQuay Central Park and the Ron Barassi Snr sports reserve at the western end of the precinct.

Originally published by Simon Johanson in The Age 6 July 2019.