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Investment sales market set for a year of repositioning of the players around the table. More ... - National Industrial Overview
Colliers International predicts increasing activity across the national leasing markets. More ... - National Metropolitan Overview
Rents hold up in tight metro markets. More ...
National Commercial Market Overview
Investment sales market set for a year of repositioning of the players around the tableOverview
The credit squeeze which has proved troubling for some highly geared institutional property players may result in some easing of investment yields in Australia’s CBD office markets but will provide an opportunity for property investors to increase their stakes or obtain exposure to the robust office leasing conditions, according to Colliers International’s latest national office market research.
Research indicates that while there was no doubt the recent turmoil in global financial markets had put fund managers under the microscope, the disposition of non-performing assets by what was likely to be a few highly-geared institutional investors with short term loans, would be unlikely to result in an oversupply of investment stock.
According to Colliers International’s NSW State Director – Commercial Research, Felice Spark, what was more likely was that an increased level of stock would add some stimulus to what had been a very tight investment market nationally characterised by record low yields.
“Given that we are coming off a very tight market it is unlikely we will see an oversupply but rather a more dynamic secondary market providing opportunities for cashed up buyers, such as wholesale funds, super funds, high net worth individuals, and investor/developers, to add value. This will see some easing of yields but it is more likely to be in secondary grades as low vacancies and strong rental growth continue to attract a high level of investor interest in and competition for Premium stock,’’ Ms Spark said.
Ms Spark said the rising cost of debt and global sharemarket volatility had also impacted on the development side as some developers pushed out construction dates for new projects.
Elsewhere the CBD research revealed continuing market strength on the back of the resources boom with vacancy rates at record lows – Melbourne’s the lowest on record, Sydney’s the lowest in 17 years, Brisbane’s the lowest on record at 0.7% and Perth’s at just 0.5% - driving strong rental and capital growth.
In Perth, rents have topped $800/m2, and some argue may well reach $1000/m2 by the end of 2008, while average, gross face rents grew by 16% in Sydney during 2007, and investment sales in Brisbane were in excess of $1.5 billion.
Research found the scarcity of CBD space and rocketing rents in Perth was driving a strong suburban office market with an estimated 150,000m2 of space expected to come online in the medium to long term.
Sydney
The Sydney CBD Office Market Indicators Report: Autumn 2008 suggested investment yields in the CBD office market may increase by between 0.25% and 0.75%.
National Director Investments Vince Kernahan, said the market expectation was that there would be a much higher number of properties for sale and a lesser number of buyers compared to 2007 resulting in yields increasing and some bargains to be had.
However, Mr Kernahan, who has witnessed changes in the Sydney market over 30 years, said he believed the market would re-rate moderately, but there would not be bargains as some were hoping for.
“There may be an increase in assets for sale this year but I don’t expect an oversupply. The number of buyers will still outweigh the assets. There is no doubt that the number of buyers has decreased in 2008 due to the exit of debt dependent buyers, however there are still cashed up super funds, wholesale funds, private investors and offshore investors keen to secure assets in the Sydney CBD,’’ Mr Kernahan said.
He said owners looking at selling may also include those with development sites as many owners recognised that missing the existing window of opportunity in the development cycle would see a substantial fall in their land values until the next cycle.
Ms Spark said the financial market pressures which had seen some developers push out construction dates for new projects would put further pressure on an increasingly tight market.
“It could now be late 2010 to 2011 before Sydney's new construction cycle gets underway providing some much-needed relief,’’ Ms Spark said.
Sydney CBD’s overall vacancy rate plummeted to a 17-year low of 3.7% in January. This is the lowest vacancy in Sydney since the 3.6% recorded in 1990 when the PCA first began recording vacancy data. The near record low was helped by a total stock reduction of 77,755m2 to 4,634,463m2, largely driven by 111,958m2 of stock withdrawals in the last half of 2007, according to the report.
Melbourne
The Melbourne CBD Office Market Indicators Report: Autumn 2008 found Melbourne’s CBD was likely to see a more dynamic B grade investment market in 2008 as institutions realigned their portfolios to improve performance and on-sold secondary stock no longer regarded as core portfolio assets.
State Director Investment Sales, Pat Burke said there was no doubt fund managers were now under the microscope and needed to be seen to be sharpening their pencils and that the results could reinvigorate the B grade market.
He said with the additional supply, yields may ease in the secondary market but would remain tight at the top end of the market where trophy assets would remain highly sought after.
Colliers International Research Analyst, Amita Mehrotra, said investment sales had had a very good 2007 with strong demand across all asset classes. Approximately 22 properties sold for circa $1.1 billion (sales in excess of $10 million) with buyers enticed by short to medium term rental growth.
Ms Mehrotra said sales activity in the last six months reflected initial passing yields of 6% to 6.25% on average for Premium grade and 5.5% to 6.5% for A and B grade properties. She said capital value growth had been strong across Premium, A and B grade markets and was expected to remain stable over the next six months.
The report also found that tightening vacancy rates and continued strong tenant demand had resulted in overall average net face rental growth across the market in the last 12 months.
Colliers International’s State Director Office and Retail Leasing, Andrew Tracey said the upward pressure on rents was likely to remain as vacancy rates in the Melbourne CBD declined further during 2008.
“With the vacancy rate at just 4.4%, Melbourne’s CBD office market is now experiencing its tightest phase since the PCA began recording data in 1990 and that situation appears unlikely to change in the short term.’’
Brisbane
According to the Brisbane CBD Office Market Indicators Report: Autumn 2008 the Brisbane CBD had a record year in 2007 with in excess of $1.5 billion worth of transactions, while gross face rents increased 15% to 25% for most office grades driven by intense competition for limited space.
Commercial Research Manager (Qld), Helen Swanson, said the Brisbane CBD office market was likely to cool to some extent and consolidate on its recent strong performance.
“In the past Brisbane has been dependent on the resources and mining industries and because of that has been considered a classic ‘boom and bust’ market, but in the past few years the Brisbane CBD office market has laid a strong foundation for long-term growth that will see it rival Sydney and Melbourne as the premier option for commercial property investment in Australia,’’ Ms Swanson said.
She said Brisbane CBD vacancy rates would likely tighten further towards the middle of the year from 0.7% – already the tightest market on record – due to a lack of new supply, and that substantial relief probably would not arrive until 2009 at the earliest when several new developments became available. She said even then, prime office space would continue to provide exceptional returns in coming years due to limited CBD stock.
Ms Swanson said the global economy loomed as the biggest potential risk to the strength of the Brisbane CBD office market.
“While the market is likely to remain strong for the majority of 2008 there is a chance that tightening debt markets, in response to the US credit crunch, may dampen demand towards the end of the year,’’ she said.
However, any fall in demand may be offset on the supply side if rising borrowing costs cause developers to defer major projects from 2009, as currently slated, to until 2010-2012, which would ensure the market remains reasonably firm, Ms Swanson said.
Gold Coast
A raft of new office building completions has pushed the Gold Coast office space vacancy figure up to 6.3% compared with the low of 4.5% twelve months ago, according to the Gold Coast Office Market Indicators Report: Autumn 2008.
The report found although the overall vacancy rate had increased the market was still strong with 16,421m2 absorbed over the last twelve months. Supply additions saw 21,160m2 of new space added to the market during the last half of 2007 and withdrawals of 7,033m2. Outside of the Gold Coast the overall vacancy figure for the combined non-CBD markets is sitting at 5.9% while the combined CBD markets are sitting at 3% vacancy.
Gold Coast Research Manager, Lynda Campbell, said of the five Gold Coast office precincts, the two smallest markets recorded decreases in their vacancy rates while the three larger markets recorded increases over the last half of 2007.
According to the report Surfers Paradise recorded the largest decrease from 6.6% to 3.9% and is sitting at a record low for the suburb, while Robina/Varsity Lakes precinct recorded the largest increase in vacancy from 4% six months ago to the current level of 9%. A Grade office space saw a large increase in vacancy of 8%, taking it to 11%.
Ms Campbell said strong population growth, low unemployment and business growth were driving the Gold Coast commercial markets and resulting in ongoing strong demand.
She said new office developments in the pipeline, amounting to an additional 127,446m2 coming onto the market, would increase the total Gold Coast market by around a third of its current size. Robina/Varsity Lakes precinct accounts for the largest amount of office space in the pipeline (65,000m2) with almost half of this already under construction, Ms Campbell said.
On the investment front the sale of Waterside West tower at Bundall in December for $33.5 million was the most significant transaction. The vendor purchased the property in June 1993 for $13.25 million.
Adelaide
The Adelaide CBD Office Market Indicators Report: Autumn 2008 found the disposal of non-performing assets following investment portfolio reviews was likely to result in a softening of yields in 2008 however it was too early to suggest any major shift in investor sentiment.
The report also suggested tenant demand was unlikely to soften given the continuing strong market fundamentals such as white-collar employment growth, business confidence and growth in the mining/resource and defence sectors.
The strong demand has seen the CBD vacancy rate reach a record low in January 2008 of 4.4% - a low which is expected to dip even further over the medium term – while rents have risen across the board and are expected to rise further over the next six to 12 months, the report said.
According to State Research Analyst, Katy Dean, while there was much talk about the possible fall-out from some troubled, highly geared, property funds, it was unlikely that the market would be flooded with unwanted stock.
She said the expected high level of demand for ‘value-add’ opportunities may keep a lid on any softening of yields while capital values should remain fairly solid over 2008.
The report found vacancy in the CBD had fallen 40% in the six months to January - the largest decrease in vacancy over a six monthly period – bringing Adelaide in line with vacancies in Melbourne and Sydney.
“In fact Adelaide is now edging closer to some of our major CBD office market competitors recording the same vacancy rate as Melbourne CBD and only 0.7% more than Sydney CBD, and with the full impact of the resources boom yet to be felt we expect those figures to firm over the course of 2008,’’ Ms Dean said.
The report found low vacancies had driven solid, if unspectacular, rental growth across the grades with Premium rents now ranging between $375/m2 and $475/m2 gross per annum, A grade rents between $340/m2 and $440/m2 gross per annum, and B grade rents between $235/m2 to $305/m2 gross per annum.
In the last six months A grade rents increased an average of $40/m2 with refurbished and repositioned stock featuring prominently, the report said. It said it was likely that the next 6 to12 months would see further rental growth particularly as more existing stock was refurbished and repositioned on the grading scale.Perth
Director of Investment Sales, Ian Mickle, said while recent market turmoil may have some dampening effect, underlying demand for CBD investment property was expected to remain solid.
“The national institutional investment market has softened in the first quarter of 2008 following turmoil we’ve seen in the capital markets. The flow-on effects of this are yet to be felt in yields but the current sale of stock – such as the 50 per cent stake in the BankWest Tower being offered here – will be a good test of the underlying strength of the Perth market.’’
According to the Perth CBD Office Market Indicators Report: Autumn 2008, Perth experienced very strong capital value growth in 2007 with yields for premium grade offices continuing to tighten. Yields fell to less than 5.5% while capital values for premium buildings now exceed $7000/m2.
Director of Office Leasing, Ian Campbell, said the Perth market could expect to see rental growth of between 15% and 20% in 2008 as extremely low supply and an enormous amount of pent-up demand from expanding businesses continued to exert upward pressure on rents.
“We’ve already seen market rents in the CBD top $800/m2, and there is a strong argument to say they may well reach $1000/m2 by the end of 2008,’’Mr Campbell said.
Mr Campbell said the flow-on effects of the squeeze on Perth office space could become a real problem for fast-growing WA businesses in the short term.
“If as a big firm in Perth you’re only offering your employees office space that’s very tight or of poor quality you may very well find you become a less-preferred employer in this market. The dilemma these businesses are faced with is do they stay in good quality office accommodation in an attempt to keep quality people, but then risk losing them because they are squeezed for space? It’s a very real issue that Perth-based companies will be facing for at least the next 18 months or so,’’ Mr Campbell said.
With new office supply not due to come to market until 2009, Mr Campbell said the combination of soaring rents and a lack of space in the CBD, together with the challenge of attracting and retaining employees, made Perth’s emerging suburban office market a real option with an estimated 150,000m2 of space expected to come online in the medium to long term.
“Government and consultancy tenants will not be prepared to stay in poor B grade office space at rents over $550/m2 when they can relocate to a quality new office building in the suburbs.”
