Flight Centre Pays $31.3 Million For St Kilda Road Office Building

Travel company Flight Centre has outmuscled institutions and private investors to purchase a St Kilda Road office which it plans to occupy.

The ASX listed company bought the 14-level 7,500 square metre B-grade building at 436 St Kilda Road for $31.3 million, paying $4,173 per square metre, considered high by agents considering two thirds of the building is vacant.

Fitzroys director Rob Harrington, who brokered the deal, said Flight Centre will relocate staff from its existing Queen Street premises.

“The timing was excellent as the previous major tenant, EDS, had almost vacated the building and the owner was about to commence refurbishment prior to an extensive marketing campaign,” said Mr Harrington.

It’s the third major sale to occur in recent weeks, and follows the sale of two fully leased assets offloaded by Investa. The biggest sale was to fund manager DB RREEF which paid $65.5 million (reflecting a rate per square metre of $4063) for 441 St Kilda Road. An as-yet undisclosed private investor also earlier this year paid $40.35 million (reflecting a rate per square metre of $3,821) for a building at 420 St Kilda Road.

The recent string of sales cap a year marked by strong performance for the historically troubled precinct.

Jones Lang LaSalle reports that the vacancy rate dropped to 6.8 per cent at the end of December — down 3.2 per cent over 2007 — the lowest recorded since 2001.

More than 24,000 square metres of space was absorbed last year, with some of the larger deals including cosmetics giant L’oreal taking 4278 square metres at 568 St Kilda Road and Telstra leasing 8000 square metres at 324 and 332 St Kilda Road.

But analysts caution that the steadily decreasing vacancy rate is directly related to declining stock levels as office buildings are removed from the market and turned to residential uses. Virtually no new stock was added to the St Kilda Road market in 2007. The building boom of the 1980s saw the area peak with 876,000 square metres of space in 1991, which dropped to 775,000 sq m last year, according to JLL.

Maria Lee, senior project manager for forecasting group BIS Shrapnel, said St Kilda Road had “lost its cachet” as an office location, becoming a secondary market to the CBD and Docklands.

“One or two large lease deals or a building being withdrawn for other uses can dramatically change the numbers, so the vacancy rate can be quite volatile,” Ms Lee said.

Jones Lang LaSalle city fringe leasing director Ian Treloar said the influx of new stock expected in the CBD over the next five years could also see these recent gains reverse.

“The strength of the St Kilda Road market will be tested as there (has) been evidence of tenants relocating from St Kilda Road to the CBD when space was available,” Mr Treloar said.

The precinct also saw a surge in rents last year caused by demand from tenants who could not afford the CBD or Docklands, where rents are typically 20 per cent higher.

Knight Frank said net face rents for St Kilda Road increased since July by 4.1 per cent to $250 per square metre for prime space and 2.3% to $220 per sq m for secondary space.

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Marc Pallisco

A former property analyst and print journalist, Marc is the publisher of realestatesource.com.au.

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