Flood of B-Grade Office Buildings to Hit The Market

According to research from Colliers International, this year will be about reducing debt and realigning portfolios for some of Australia's largest property institutions with exposure to the Melbourne CBD office sector.

The result will be a surge in the number of B-grade (secondary grade) office buildings put to the market as institutions aim to liquidate non-core assets and focus on improving the quality of their portfolios.

Fund managers must be seen to be reducing debt gearing levels, said Colliers International's state director of investment sales, Pat Burke. "It is unlikely we'll see an oversupply but rather a more dynamic and vigorous B-grade market (this year)."

Mr Burke said the pool of cashed-up buyers - including wholesale funds, super funds, high net worth individuals, and developers looking to add value to B-grade buildings - was still "very strong" despite recent sharemarket volatility, making it a good time in the property cycle to sell. But he warned that any increase in the supply of secondary buildings for sale - particularly in the second half of the year, which is busier for investment sales - might increase average sale yields.

Colliers research shows average yields for secondary buildings, which are at record lows, now range from 5.5% to 6.5%. Rising rents and falling office vacancy levels have contributed to average yields falling in each of the past five years. A lack of secondary buildings available to buy in 2006 and 2007 also contributed to that fall.

Property Council of Australia research shows the secondary grade office sector feels the extremes of volatile office leasing conditions more than higher-quality (A-grade) buildings, potentially making them a riskier asset sector in a downturn.

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