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Commercial sales to firm

Negative sentiment and concern about the global economic outlook have been key challenges for the commercial property market in 2012. Decision makers have sometimes lacked the confidence with investment choices, wary of jeopardising job security. This is despite the fact that, with the cost of debt reducing, the attractiveness of property has increased.

Another issue has been the continued divergence between market pricing and valuations due to buyers' more conservative pricing - below book values - for assets considered non-core.

Both factors are reflected in transaction data which shows that about $2.8 billion of commercial property priced above $5 million changed hands during the third quarter - 8 per cent lower than the corresponding period in 2011.

However, it's increasingly evident that there is money out there for the right product. Because of pent-up demand, we expect to see stronger investment activity leading into 2013 as confidence in the global economic outlook improves.

But the mindset of buyers will need to shift to break the impasse.

Hurdle rates will need to be pushed lower and buyers will have to accept lower returns to secure stock. That said, we expect that buyers will have more conservative assumptions on growth.


Another issue has been the limited supply of prime CBD stock. When appropriate stock is offered, such as 60 Carrington Street in the CBD, we're seeing aggressive bidding, particularly from the A-REITs.

On the flipside, the REIT managers are looking to recycle out of non-core assets but these are not trading quickly, as there is a general unwillingness by investors to take on risk and only a limited number of players are looking to acquire value-add properties.

While I don't expect the outlook towards risk will change in the short term, I do expect buyers will become increasingly willing to look beyond the major CBD markets to consider prime suburban investment opportunities. Examples are 99 Walker Street, North Sydney, and the pending deal on the Eclipse Tower in Parramatta. Given the limited number of CBD investment opportunities, we expect that buyers will continue to broaden their horizons moving into next year.

Rob Sewell is the regional director of Institutional Investment Properties at CBRE.