AUSTRALIAN OFFICE M3INSIGHT - WINTER 2019 - M3PROPERTY
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Australian Office m3Insight - Winter 2019
Contents
Market Overview....................................................... 03
State by State............................................................ 04
Key Sales .................................................................. 05
Sydney................................................................... 07
Melbourne ............................................................. 09
Brisbane................................................................. 11
Adelaide ................................................................ 13
Perth ..................................................................... 15
Opportunities and Challenges
Outlook ................................................................ 17
• The Australian CBD office markets are at varying places
within their respective property cycles.
• Most markets are in the upward phase with Sydney and
Melbourne approaching a peak, Adelaide in a stable
growth phase, Brisbane and Canberra in early upturn
and Perth at the nadir of its cycle.
• Over the three-year outlook, from 2019-2021, there are
likely to be major risks faced by the office markets,
including further adoption of technology, challenging
economic conditions both domestically and globally
and supply cycles gaining momentum, particularly in
Sydney and Melbourne.
• Despite the risks, a moderate cycle is predicted across
all markets. Landlords appear to have taken heed
Definitions: A-REIT: ASX listed Australian Real Estate Investment Trust. Completion date: determined by issue of a “Certificate
of previous cycles and in most cases are delaying of Occupancy” Grade: is determined using the PCA report “A Guide to Office Building Quality”. Net absorption: is the change
starting new supply projects until pre-commitments are in occupied stock within a market over a specified period of time. Net lettable area (NLA): defined in accordance with the PCA
achieved. “Method of Measurement” Pre-commitment: contract signed to occupy space in new or refurbished space prior to construction
commencing. Prime: Combination of premium and grade A. Secondary: Combination of grades B, C and D. WALE: Weighted
average lease expiry.
1 Australian Office | m3 Insight 2019 m3property 2
CBD Office Key Indicators & 12-month
Sources and Notes:
• WCE (White Collar Employment Sectors)
Change by Market
annual growth 2018 - BIS Oxford Economics
Market Overview
and m3property Research
• Vacancy Rate - Property Council of Australia
Office Market Report (January 2019)
• *Rents, Incentives & Yields (as at March
Quarter 2019) - m3property Research
Key Leasing Market Trends
• Occupier demand strengthened, driving positive net
absorption in the Australian CBDs, except Canberra, over
the year to January 2019. Similarly, vacancy rates declined
Perth CBD Brisbane CBD
across all CBD markets, except Canberra. Yr to
Yr to Indicator Current
• There has been solid demand from Finance and Insurance, Indicator Current Dec-18
Dec-18
IT and Communications, Wholesale and Retail Trade, WCE Growth -2.2%
Health and Professional Services firms over the year WCE Growth -0.2%
to March 2019. Mining and Infrastructure firms are also Total Vacancy Rate 13.0%
Total Vacancy Rate 18.5%
taking a growing amount of space in Western Australia and Prime Incentive 37.0%
Queensland. Education and Training and the Government Prime Incentive 49.0% * *
Sector have reduced the level of demand for office space Prime Net Face Rent $585/m2 *
Prime Net Face Rent $603/m2 *
nationally compared to the year prior.
Prime Yield 6.63% *
Prime Yield 5.63% *
• A strong national pipeline of infrastructure works and
major projects across most states has boosted white-
collar employment nationally.
• Co-working providers create flexible and collegiate spaces
within their tenancies allowing interaction between team
members and people from within the same industries. They
have expanded their national presence and accounted for
a large share of demand for new office space in a number
of markets.
Key Investment Market Trends
• National trends hide a myriad of individual markets and
buildings with their own risk/return profiles.
• Landlords constantly assess the requirement for new
services, environmental features, additional support,
flexibility or technology for their tenants and how
to best use space to reduce risk and improve the
performance of their assets. Adelaide CBD Sydney CBD
• Office property remains on investors’ buy lists, however, Yr to Yr to
Indicator Current Indicator Current
buyers are unwilling to pay over-market prices resulting Dec-18 Dec-18
in some properties being taken off the market and yields WCE Growth -0.1%
considered to be close to, or at, their peaks. Melbourne CBD WCE Growth -1.2%
Total Vacancy Rate 14.2% Total Vacancy Rate 4.1%
• Investors continue to pay close attention to tenancy profiles. Yr to
Indicator Current
Prime Incentive 35.0% Dec-18
There appears to be an increasing focus on business * Prime Incentive 19.0% *
services, property services and technology-based tenancy WCE Growth -1.7%
profiles. With a higher proportion of these tenants within
Prime Net Face Rent $403/m 2
* Prime Net Face Rent $1,107/m 2
*
Total Vacancy Rate 3.2%
the eastern seaboard CBDs, these markets continue to Prime Yield 6.50% * Prime Yield 4.69% *
outperform. That said, with improving resources markets, Prime Incentive 24.0% *
investment demand is increasing in Brisbane and Perth.
Adelaide and Canberra are also seeing demand for the
Prime Net Face Rent $625/m2 *
limited stock available on the market. Prime Yield 5.13% *
3 Australian Office | m3 Insight 2019 m3property 4
Significant CBD
Office Sales
Market Market
Address Qtr Price Purchaser Address Qtr Price Purchaser
Yield Yield
Sydney Brisbane
62 Pitt Street, Sydney Q1 19 $50,000,000 3.49% Bank of Sydney 201 Charlotte Street, Brisbane Q1 19 $126,700,000 6.03% Kyko Group
10 Shelley Street, Sydney Q4 18 $533,000,000 4.99% Charter Hall 288 Edward Street, Brisbane Q1 19 $113,415,000 6.98% Marquette Properties/
Heitman
12 Shelley Street, Sydney Q4 18 $271,000,000 5.09% Charter Hall
133 Mary Street, Brisbane Q1 19 $96,500,000 6.02% ARA Australia
60 Margaret Street, Sydney (50%) Q4 18 $337,500,000 4.98% Blackstone 293 Queen Street, Brisbane Q4 18 $52,250,000 5.64% LaSalle Investment Mgmt
275 Kent Street, Sydney (50%) Q4 18 $721,900,000 4.56% ISPT 61 Mary Street, Brisbane Q4 18 $275,000,000 5.84% Charter Hall
110 Eagle Street, Brisbane Q3 18 $35,250,000 6.60% Capital Property Funds
60 Carrington Street, Sydney Q3 18 $270,000,000 4.81% AMP
40 Tank Street, Brisbane Q3 18 $93,038,127 5.79% Charter Hall
50 Carrington Street, Sydney Q3 18 $205,000,000 4.76% AMP
80 Ann Street, Brisbane (50%) Q3 18 $418,000,000 5.00% M&G Real Estate
Melbourne
260 Queen Street, Brisbane Q3 18 $95,250,000 6.68% Hines
80 Collins Street, Melbourne Q1 19 $1,476,000,000 NA Dexus 100 Edward Street, Brisbane Q3 18 $64,000,000 5.61% RCP Property Australia
595 Collins Street, Melbourne Q4 18 $314,000,000 5.05% Foreign Investor Adelaide
85 Spring Street, Melbourne Q1 19 $114,000,000 NA Private Investor 77 Grenfell Street, Adelaide Q4 18 $103,500,000 7.25% WING IPG Adelaide P/L
737 Bourke Street, Melbourne Q1 19 $192,000,000 5.14% Charter Hall 431 King William Street, Adelaide Q3 18 $43,100,000 7.89% QE MF 102 P/L
555 Collins Street, Melbourne Q4 18 $140,000,000 NA Charter Hall Perth
Workzone West, 202 Pier Street, Perth Q4 18 $125,250,000 7.04% Elanor Investors
31 Queen Street, Melbourne Q1 18 $200,500,000 4.8% AEW Capital
Exchange Tower 2 The Esplanade, Q4 18 $309,400,000 6.19% GIC Private Ltd
60 Collins Street, Melbourne Q3 18 $160,000,000 NA Dexus
Perth (leasehold)
NA = Not Available
5 Australian Office | m3 Insight 2019 m3property 6
Sydney CBD
By Katherine Tambouras | Research Analyst
katherine.tambouras@m3property.com.au Have yields reached their peak? Sydney CBD Office Sales Volume
7,000
• Sales activity is expected to remain solid over 2019 due
Sales volume ($millions)
to positive market fundamentals. Domestic and foreign 6,000
investors consider the Sydney CBD to be an attractive 5,000
market due to its transparency and capability to attain 4,000
higher returns than many other global cities. 3,000
Low vacancy continues...
2,000
• Transaction activity was strong over the year to March
• The Sydney CBD office supply and demand fundamentals Supply, Demand and Vacancy
2019 with approximately $6.4 billion of sales recorded, 1,000
have been positive over the past 12 months and are 250,000 10.0%
Net supply and absorption (m2)
Forecast
expected to remain that way over the next year. 200,000 8.0% representing an increase of 5.0% compared to the -
150,000 6.0% same time the year prior. However, we note that the
• Office withdrawals for various projects have led to
Vacancy
100,000 4.0% number of transactions have decreased over the same
a shortage of office space in the market. This has Source: m3property Research. Office sales over $5 million *To end of
50,000 2.0% period of time. May 2019.
reduced the vacancy rate, which as at January 2019 0 0.0%
was recording a ten-year low of 4.1%. This has worked -50,000 -2.0% • Yields across prime and secondary offices continued to
well for landlords in the Sydney CBD as tenant demand -100,000 -4.0% firm over the year, driven by solid market fundamentals
remains positive and rents continue to rise. and strong investor demand. Sydney CBD Yields
10.00%
• The latest Property Council of Australia Office Market • Unlisted property funds, A-REITs and foreign investors Forecast
Net Supply Net Absorption Vacancy
Report indicated positive net absorption levels at accounted for the majority of sales recorded over the 8.00%
Source: Property Council of Australia OMR (January 2019) and
10,443m² over the twelve-month period to January year. 6.00%
m3property Research (June 2019).
2019. This was due to positive prime net absorption
• It is expected that yields will remain low over 2019 4.00%
of 53,333m² more than accounting for the negative
Address Approx. Status due to low vacancy and rental growth, which should Prime
secondary grade net absorption of -42,890m². This grade NLA (m²) 2.00%
continue to drive investment demand. However, yields Secondary
has been significantly impacted by stock withdrawals 60 Martin Place 38,600 UC
are considered to have reached their peak and it is 0.00%
from the market.
Wynyard Place, 58,974 UC likely that they will stabilise over the short-term.
• Vacancy is forecast to continue to decrease up until late 10 Carrington Street
2020. This is due to expected positive net absorption • The recent cut to the official interest rates is unlikely to
and high levels of stock withdrawals from the market CQ Tower, 54,594 UC have any significant impact on yields in Sydney CBD. Source: m3property Research (May 2019).
180 George Street
over 2019/2020 for refurbishment and redevelopment. Market set to turn with upcoming supply
• The downward trend in vacancy is likely to reverse in Daramu House, 10,000 UC • As vacancy rates are expected to decrease further over
1 Sussex Street
2021 as large supply projects in the pipeline start to the short-term affordability of office space within the
complete leaving backfill space across the CBD. 50 Bridge Street 88,274 UC
Sydney CBD is likely to become an issue for tenants.
Rental growth positive, but slowing Source: Core Logic and m3property
• The relocation of some tenants or parts of businesses
Note: UC – Under Construction; NLA – Net Lettable Area.
• Tenant demand and low vacancy along with minimal new Note: Table doesn’t include refurbishments. from the Sydney CBD to more affordable fringe and
office supply and stock withdrawals have driven rental other metropolitan locations is likely due to rental
growth within the Sydney CBD. increases.
Sydney CBD Gross Face Rents
• Gross face rents in the CBD increased over the year to $1,600 • New projects forecast to be delivered to the market
Prime net face rents ($/m2)
March 2019, with growth of 1.18% recorded for prime $1,400 from 2021 will provide more alternatives for tenants in
and 2.67% for secondary office space. $1,200 terms of additional options for lease, and a slowdown
$1,000
• Incentives stabilised for prime and decreased for of rental growth, particularly in the secondary market.
$800
secondary space over the year to March 2019. The low $600 • Investor demand within the Sydney CBD will continue
vacancy is putting downward pressure on incentives but $400 Prime to be solid as new projects lift the quality profile of the
this is being offset in the prime market by future supply, $200 Secondary
market.
Forecast
which is already competing for tenants. $-
• Yields are expected to stabilise across both prime and
• m3property Research forecasts rents to continue to grow secondary markets over the short-term.
from 2019 to late-2020, before stabilising when backfill
space and new stock enters the market increasing Source: m3property Research (May 2019).
vacancy from 2021 onwards. m3property Valuation
477 Pitt Street, Sydney
7 Australian Office | m3 Insight 2019 m3property 8
Melbourne CBD
By Amita Mehra | National Director Research, Marketing & Strategy
amita.mehra@m3property.com.au Low vacancy drives rental growth Melbourne CBD Net Face Rents
• Strong tenant demand, low vacancy and limited new $800
Prime
supply resulted in 6.5% growth in net effective rents $700
Net Face Rents ($/m2)
Secondary
$600
over the 12 months to March 2019.
$500
• Face rentals in Melbourne’s CBD prime office market $400
Vacancy to remain at record low level witnessed growth of 5% over the year to March 2019, $300
currently ranging from $500/m² to $750/m². $200
• The Melbourne CBD market continued to record low $100
vacancy of 3.2% as at January 2019 well below the Supply, Demand and Vacancy • Incentives for prime grade office property has declined to $0
300,000 15.0%
Net supply and absorption (m2)
long term average (since 1990) of 10.9%. Prime grade circa 20.5%–27.5% during March 2019. It is anticipated
250,000 12.0%
vacancy fell to 3.2% in January 2019 from 3.5% in incentives will remain stable due to improved tenant
200,000
January 2018. Secondary grade vacancy also recorded 9.0% leasing conditions and new supply entering the market
Vacancy rate
150,000 Source: m3property Research (May 2019).
a decline from 5.6% in January 2018 to 3.7% in January 6.0% during 2019.
100,000
2019.
50,000
3.0% Strong start to 2019
• According to the Property Council of Australia Office 0.0%
0 • Following a strong year of transactions in 2017, 2018
Market Report, a strong positive net absorption of
-50,000 -3.0% had relatively limited sales activity with the total sum of
135,290m² was recorded over the last 12 months, above
office transactions in the CBD totalling circa $3.5 billion Melbourne CBD Office Sales Volume
the 10-year average of 87,648m².
compared to circa $4.4 billion the previous year. 5,000
Net Supply Net Absorption Vacancy Rate
• m3property forecast the vacancy to decline further to Source: m3property Research (June 2019).
4,500
• The current volatility of the Australian Dollar should 4,000
Sales volume ($millions)
3.1% by the end of 2019 before it peaks during 2020
stimulate increased foreign investment into the CBD 3,500
when the vacancy rate reaches 6.0%. 3,000
office market.
Supply Pre-committments 2,500
87% of new supply under construction 70000 • Over the first quarter of this year, transaction activity 2,000
pre-committed 60000 remained strong with a total of $2.20 billion worth of
1,500
50000 1,000
Area (m²)
• Melbourne CBD has approximately 453,000m² of supply 40000 stock already being sold. 500
under construction (over 10 buildings) to be completed 30000 0
20000 • Significant transactions to occur for this year include
between 2019–2021 with approximately 377,700m² 10000 the sale of 80 Collins Street ($1.5 billion), 595 Collins
(87%) already pre-committed. 0 Street ($314 million) and 737 Bourke Street ($192
Source: m3property Research. Office sales over $5 million *To end of
839 Collins St
447 Collins St
477 Collins St
697 Collins St
130 Lonsdale St
405 Bourke St
276 Flinders St
271 Spring St
80 Collins St
311 Spencer St
• New stock expected to come online by the end of 2019 million). May 2019.
includes 107,300m2 of new development with 96% of Yield compression to continue
this pre-committed.
• Prime yields tightened by 50 basis points over the last
• There are 12 office buildings currently undergoing Available NLA Committed
12 months to range between 4.75% and 5.25%. Over
development, full refurbishment or partial refurbishment the same period, secondary yields compressed 50
Source: m3property Research (May 2019).
to be completed over the next three years across the basis points to range between 5.00% and 6.00%. Melbourne CBD Yields
CBD comprising 479,167m² of total NLA. 10%
• Yields within the Melbourne CBD office market have
Co-working space is booming in reached historically low levels. The current spread
8%
Melbourne CBD Operator Location Approx.
Yields (%)
between Melbourne’s CBD prime office yields and 6%
NLA (m²)
• The last 12 months has seen co-working space to majors WeWork 120 Spencer Street 8,500 government bonds is approximately 2.6 percentage 4%
expand in a tight Melbourne CBD office market. During points, which is considered wide when compared to the
WeWork 222 Exhibition Street 5,200 2%
Q1 2019 approximately 21,000m² of co-working space 20-year average of around 1.8 percentage points.
in Melbourne CBD was taken up by Singaporean co- 0%
Property image
Spaces 161 Collins Street 4,300 • Strong investment demand and limited stock available
working company JustCo.
for investment will continue to drive yield compression.
JustCo 15 William Street 8,300
• Key operators including WeWork, HUB, Spaces and 10-year Bond Prime Secondary
• According to m3property Research, yields are expected
JustCo occupy the majority of coworking space in Justco 441 Collins Street 4,700
to remain low due to strong rental growth. This should
Melbourne CBD. Source: BIS Oxford Economics and m3property Research (May 2019).
JustCo 15 William Street 8,200 drive continued investment demand in the Melbourne
• According to Office Hub report the price per desk in market. However, the rate of firming has already slowed
Melbourne dropped by 10.15% over 2017–2018 as a and this is expected to continue to be the case over the
result of competition in the co-working spaces. short-term with the 10-year bond rate rising.
9 Australian Office | m3 Insight 2019 m3property 10
Brisbane CBD
By Casey Robinson | Research Director
casey.robinson@m3property.com.au Evidence of yield compression
201 Charlotte Street, Brisbane
Sale Date Oct-15 Mar-19
Price $81,500,000 $126,700,000
Rate $/m2 $6,065 $9,533
Back to the fundamentals for the Brisbane Supply, Demand and Vacancy EMY 7.94% 6.03%
commercial market 150,000 18.0% 191 basis point reduction in yield due to occupancy profile reset
Net supply and absorption (m2)
Forecast and stronger investment demand.
• During recent years, the Inner Brisbane leasing market 100,000
12.0%
has been driven by some key trends, such as: 2 King Street, Fortitude Valley
Vacancy
6.0%
-- The State Government’s expansion of its space 50,000
Sale Date May-15 Aug-18
0.0%
requirements; Price $131,885,000 $170,000,000
0
-- Growth of co-working and other flexible office providers; -6.0%
Rate $/m2 $7,951 $10,339
-- The ‘flight to quality’ of tenants; -50,000 -12.0% EMY 6.95% 5.82%
-- Centralisation of tenants; and 113 basis point reduction in yield due to stronger investment
demand.
-- The consolidation of multiple offices into singular Net Supply Net Absorption Vacancy Rate
locations.
Rental growth will drive returns going m3 Valuation
Source: Property Council of Australia OMR (January 2019) and forward 201 Charlotte Street, Brisbane
m3property Research (June 2019). m3 Valuation
• These factors, combined with the withdrawal of some 201 Charlotte Street, Brisbane
• The Inner Brisbane commercial market is in a definite
secondary-grade buildings, resulted in the CBD vacancy Brisbane Prime CBD Rents
stage of recovery. Whilst during recent years there $1,200
rate declining from 16.2% as at January 2018 to be Forecast
Inner Brisbane Office Sales Volume was a substantial disconnect between the leasing and $1,100
13.0% as at January 2019.
$3.5 investment markets, this disconnect is slowly starting $1,000
Billions
Fringe
• With the exception of the still growing co-working sector, $3.0 to dissipate. $900
$/m2
CBD $800
these drivers are now playing a smaller role in the Inner • Rental growth will be the primary driver of total returns
$2.5 $700
Brisbane leasing market. We expect that leasing demand for Inner Brisbane commercial assets over the medium-
$2.0 $600
in the Inner Brisbane market will be driven more from a to longer-term, with yield compression now thought to Gross Face
$500
macroeconomic level, with growth in public and private $1.5 be slowing. Driving rental growth will be solid economic Gross Effective
$400
investment, employment and the overall economy being $1.0 fundamentals and the declining vacancy.
the key determinants of net absorption.
$0.5
Yield compression driven by investment $0.0 Brisbane CBD outlook Source: m3property Research (May 2019).
demand, not rental growth 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: m3property Research (May 2019).
• Commercial property remains a sought-after asset 2019-2022 2023-2025
class by both domestic and offshore buyers. Demand in
Brisbane is emanating from higher yields on offer when
170,000m2
Inner Brisbane Yields New Supply 300 George Street, 12 Creek Street,
No new supply confirmed
compared to Sydney, Melbourne and offshore. During 11.0% Midtown Centre, 80 Ann Street.
2018 there was $2.75 billion of commercial property
10.0%
sold across the Inner Brisbane market, up marginally
from 2017. CBD yields currently range between 5.00%
9.0% Major Project Completions
and 6.25% for prime buildings and 5.75% to 7.00% for 8.0% 2nd Runway Cruise Terminal Queen’s Wharf Cross River Rail
secondary buildings. Prime Fringe yields currently range 7.0% Volatile and driven by supply.
between 5.75% and 7.00%. Likely to increase in 2019 before trending down To reach circa 10%, asuming no additional new
6.0% Vacancy until the completions of Midtown Centre and 80 supply is completed, by the end of 2025.
• Yields tightened considerably across the Inner Brisbane Ann Street, which will push vacancy up in 2022.
5.0%
market over the past five years. In addition, the spread
4.0% Whilst the economy is strengthening, rental Strong economic conditions and declining
between yields for secondary assets and prime assets Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Rental Growth growth will be limited because of the vacancy vacancy will boost face and effective (through
has narrowed. Buildings that have been sold multiple rate. declining incentives) rents.
times during recent years demonstrate this trend of yield
compression, as shown on the adjacent Inner Brisbane Potential for further tightening of yields in 2019 Yields expected to be relatively stable in this
Investment Market before stabilising in 2020 period as bond rates stabilise
Yield Compression Chart.
Source: m3property Research (May 2019).
Source: m3property Research (June 2019).
11 Australian Office | m3 Insight 2019 m3property 12
Adelaide CBD
By Zoe Haskett | Research Manager
zoe.haskett@m3property.com.au Record-breaking 2018 for sales Adelaide CBD Office Sales Volume
• The third and final cut to fully abolish stamp duty on 1,000
Sales Volume ($millions)
commercial property transactions on 1 July 2018 has 900
800
made a positive impact on investment demand. This
700
should continue to give South Australia a competitive 600
advantage over other states, making investment 500
Fundamentals continue to improve opportunities in South Australia more attractive.
400
300
• According to the Property Council of Australia Office Supply, Demand and Vacancy 200
50,000 20.0% • The strong investment demand has driven record-
Net supply and absorption (m2)
100
Market Report, Adelaide recorded net absorption of 40,000
Forecast
breaking sales volumes over 2018. Circa $886.37 -
16,509m2 over the year to January 2019. This was 30,000 15.0% million worth of investment transactions occurred in
above the amount recorded for the previous period and 20,000
Vacancy
2018 (over the $5.0 million threshold). This was the
also above the amount achieved in the Sydney CBD 10,000 10.0%
highest level since records commenced at m3property Source: m3property Research. Office sales over $5 million *To end of
0 May 2019.
office market over the same period. Net absorption was in 2006. Comparatively the first four months of 2019 has
-10,000 5.0%
strongest for secondary grade buildings over the year. -20,000 started slowly with just the one major sale of 121 King
• The vacancy rate for the Adelaide CBD remains -30,000 0.0% Street for $82.25 million recorded. However, with 55
elevated but recorded a further fall of 0.5 percentage Currie Street and 25 Grenfell Street both on the market Adelaide CBD Yields
12.00%
points from 14.7% in July 2018 to 14.2% in January Net Supply Net Absorption Vacancy
among other CBD assets the totals are expected to rise Forecast
10.00%
2019. The vacancy rate is now 2.0 percentage points in the short-term.
Source: Property Council of Australia OMR (January 2019) and 8.00%
lower than its peak of 16.2% in January 2017. Steady • Unlisted property funds, syndicates and private
m3property Research (June 2019).
stock levels combined with above long-term average investors accounted for the majority of sales by value. 6.00%
net absorption, placed downward pressure on vacancy. Interest in Adelaide is expected to remain positive due 4.00%
Prime
Vacancy rates for both prime and secondary grade to it being an attractive alternative to the tighter yields in
Address Approx. Status 2.00% Secondary
stock declined over the year to January 2019 to stand NLA (m²) the eastern seaboard states and stamp duty not adding 0.00%
at 1.5% and 14.6%, respectively. 43 Franklin Street 6,600 UC - 2019 to the cost of purchase in South Australia.
• Adelaide is at the bottom of the supply cycle. The next • Market yields as at March 2019 ranged between 6.00%
2-10 Franklin Street 24,500 UC - 2019
upswing is anticipated to begin in the third quarter of and 7.00% for prime stock and 7.50% and 9.00% for Source: m3property Research (May 2019).
2019 when Charter Hall’s 24,500m2 GPO Tower is due 198-200 North Terrace 26,000 DA Approved secondary assets.
to complete. The building is over 90% pre-committed to
by the Attorney Generals Department and BHP. 1 Station Road 40,000 DA Approved The outlook is positive
• According to m3property Research, vacancy is forecast
Leasing market remains active 42-56 Franklin Street 21,000 DA Approved
to decline slightly over the first half of this year, before
• The majority of tenant enquiry is coming from tenants rising again towards the end of 2019 when the GPO
Source: Core Logic and m3property Note: UC – Under Construction;
requiring circa 500m2. While a number of businesses NLA – Net Lettable Area. Note: Table doesn’t include refurbishments. Tower completes and the subsequent backfill space
are moving into the expansion phase, increased work is offered to the market. This backfill space will be a
space efficiency has continued to result in a healthy combination of direct and sublease vacancy. Vacancy
portion of renewals taking a reduced amount of space. is expected to continue its downward trend thereafter at
• While leasing demand has strengthened, there Adelaide CBD Net Face Rents a steady pace until 2021 before supply additions push
$500
continues to be a state of oversupply in the market. As Forecast it back up.
Prime net face rents ($/m2)
a result, there are still likely to be many opportunities $400 • A total of 24,200m2 of net supply is expected to be
for small- to medium-sized tenants entering the leasing completed over 2019. Beyond this, major developments
$300
market as well as for existing tenants whose leases are are unlikely to go ahead unless significant pre-
close to expiry. This has resulted in face rents being $200
commitment is achieved.
stable over the 12 months to March 2019. Prime
$100
Secondary • We expect net face rents to increase by between 1.7%
• According to m3property, net face rents as at March and 3.5% over the next three years as the vacancy falls.
$-
2019 ranged from $370/m2 to $435/m2 for prime assets Incentives are expected to start to peel back in 2020.
and $230/m2 to $355/m2 for secondary stock.
• Yields are forecast to have reached the bottom of the
• Incentives remain at elevated levels, with owners largely current cycle and are expected to stabilise over the
trying to maintain face rents in negotiations. Incentives Source: m3property Research (May 2019).
next 12 to 24 months.
for prime and secondary grade stock ranged from 30%
m3property Valuation
40% and 25% to 40% respectively as at March 2019.
50 Flinders Street, Adelaide
13 Australian Office | m3 Insight 2019 m3property 14
Perth CBD
By Jennifer Williams | National Director Research
jennifer.williams@m3property.com.au Sales activity strengthens Perth CBD Office Sales Volume
• Sales activity in Perth CBD has been rising since 2015 1,600
Sales volume ($millions)
1,400
and has been solid over the first four months of 2019.
1,200
There are also a number of buildings on the market
1,000
at current including 570 Wellington Street, 181 St
800
Georges Terrace and 246 Adelaide Terrace.
Confidence returning 600
• Looking over the year to the March quarter 2019, 400
• Confidence is starting to return in the Perth CBD despite WA Employment Growth
350.0 sales reached $899.82 million, largely due to a strong 200
People Employed (000's)
the vacancy still being at 18.5%, as at January 2019 and 300.0 fourth quarter of 2018 and start to 2019. Over the year, -
is expected to rise further over 2019. 250.0 unlisted funds were the most active purchaser group,
200.0
• Vacancy has reduced in Perth CBD since peaking accounting for 47.3% of sales.
150.0
in December 2016. Net supply of -8,523m2 and net 100.0 • Investment demand is expected to continue in Perth Source: m3property Research. Office sales over $5 million *To end of
absorption of 62,641m2 drove this result. Looking 50.0 CBD over the short-term as confidence returns generally May 2019.
forward, however, net supply is set to increase in 0.0
to the state. This is largely due to the strengthening
2019 with the completion of the refurbishment of 240 performance of mining and continued spending on
St George’s Terrace and a number of other small new Admin & Support Services Finance & Insurance infrastructure.
builds and refurbishments. While most of this space will Information Media & Telecom Public Admin & Safety
Rental, Hiring & Real Estate Mining
be committed prior to completion it is the back-fill space Education & Training Yields still attractive
left by tenants such as Wood Group, HWL Ebsworth and Source: BIS Oxford Economics (June 2019). • Investment yields have tightened over the year to Perth CBD Yields
10.00%
Iluka Resources that will result in rising vacancy in 2019, March 2019 by 13 basis points, unlike most CBDs Forecast
back to above 20%. further tightening is expected in 2019 on the back of 8.00%
• In itself, this rise seems like a step backwards in an improving demand and the average yield being higher 6.00%
New and Full Refurbishment Approx. Status
improving market, however, we believe this to be a than the other CBDs so still attractive to overseas and
Projects NLA (m²)
interstate investors. 4.00%
further sign of returning confidence and an indication 240 St Georges Terrace - Ref 47,300 2019 Prime
that landlords in Perth are preparing for the next upturn. • For secondary stock, yields have been stable over 2.00%
Secondary
The recent announcement by Brookfield that they have Glass Box, 300 Murray Street - Ext 2,300 UC - 2019 the year to March 2019 and this is likely to continue 0.00%
purchased Lot 7, Elizabeth Quay from Chevron, on over 2019 as the market is driven more by local private
City Central, 166 Murray Street 1,125 DA App - 2019
a sale and leaseback basis, and will be commencing investors and syndicates.
development of the site in mid-2020 is another key sign 125 Murray Street 5,200 UC - 2019
of an improving Perth office market. Perth CBD slowly turning the corner
Source: m3property Research (May 2019).
Corner Milligan and Murray Street 10,000 DA App - 2020 • Vacancy is expected to rise over 2019, due to backspace
• The five-year outlook for Perth is for sporadic supply
driven by pre-commitments and moderate tenant 1 The Esplanade (Elizabeth Quay) 42,000 DA App - 2023
and vacancy from the completion of the refurbishment
demand driven by public administration and mining. of 240 St Georges Terrace, rents are likely to remain
Source: Core Logic and m3property Note: UC – Under Construction;
DA Development Application; NLA – Net Lettable Area; Ref -
low in the short-term. With demand continuing to be
The next rent move should be up Refurbishments; EXT - Extensions. positive and supply dropping off from 2020 to 2022, the
• Due to vacancy remaining high, but offset by positive Perth market is expected to have reached the nadir of
the current property cycle and should see a return to Supply, Demand and Vacancy
occupier demand and falling vacancy, prime face rents 150,000 25.0%
Net supply and absorption (m2)
growth over 2020. Forecast
have now been stable since September 2017. It is Perth CBD Net Face Rents
$1,000 100,000 20.0%
forecast that the next rent move is upwards for prime Forecast • The investment market in Perth is witnessing a slow
Prime net face rents ($/m2)
stock in Perth, although that move could still be a year 50,000 15.0%
Vacancy
$800 but steady improvement with sales levels increasing
away given negotiation power remains in the hands of since 2015 and having already started solidly in the first
$600 0 10.0%
tenants with 140,295m2 of prime space still available at four months of 2019. Prime yields have been slowly
January 2019 and more by the end of 2019. $400 -50,000 5.0%
falling since peaking in 2009 and are expected to see
Prime a further slight tightening in 2019. Secondary yields are
• Conditions in the secondary market remain fraught. $200 -100,000 0.0%
Secondary
While it appears that this market may be stabilising with expected to be stable over the next few years.
$-
15 months of unchanged rents, the vacancy is still high Net Supply Net Absorption Vacancy
at 27.4%, compared to 13.0% for prime space. The
advantage secondary stock has is the large gap between Source: Property Council of Australia OMR (January 2019) and
m3property Research (June 2019).
it and prime rents. However, with rents being a lower Source: m3property Research (May 2019).
cost than attracting a high-quality workforce many firms
are likely to look at the current market as an opportunity
to move into discounted prime space.
15 Australian Office | m3 Insight 2019 m3property 16
Outlook
National CBD Office
The Australian CBD office markets are at varying places in
their respective property cycles. Generally, most markets
rationalisation are more likely to directly impact the CBDs
and the indirect impacts on supporting industries will also
Key Contacts
are in the upward phase with Sydney and Melbourne affect office markets generally.
heading towards a peak, Adelaide in a stable growth Overall net absorption in the CBDs is expected to be
phase, Brisbane and Canberra in early upturn and Perth positive over the three-year outlook, with the largest annual
at the nadir of its cycle. Over the three-year outlook average expected in the Melbourne CBD. Melbourne CBD,
from 2019-2021, there are likely to be risks faced by the despite the strong take-up, is expected to see vacancy rise,
office markets, including further adoption of technology, due to a large increase in supply. Sydney CBD is the other
challenging economic conditions both domestically and market expected to see vacancy rise by the end of 2021, Andrew Duguid John Callaghan Joel Ducey
globally and supply cycles gaining momentum, particularly due to strong net supply. Brisbane is expected to witness Managing Director | NSW Director | NSW Director | NSW
in Sydney and Melbourne. But there are potential positives low to moderate supply over the period, resulting in falling +6 417 343 772 +61 404 055 666 +61 402 266 719
with official interest rates likely to be cut again and tax cuts andrew.duguid@m3property.com.au john.callaghan@m3property.com.au joel.ducey@m3property.com.au
vacancy over the three years. Perth and Adelaide CBDs will
providing further stimulus for improved economic growth. see a rise in supply and vacancy in 2019 before following
It was recently reported that many Australian Banks are the same downward trend as Brisbane in 2020 and 2021.
looking to embark on programmes of cost-cutting by Other than Melbourne, prime face rents have only risen
using new technologies including blockchain and artificial marginally, if at all, over the year to March 2019, and
intelligence to reduce staff numbers. According to The are forecast to continue this trend in the short-term.
Australian Business Review’s Margin Call, initially, this Gary Longden Michael Coverdale Simon Hickin
could result in job cuts of up to 20-25% in some of the Landlords appear cautious about increasing rents in Director | VIC Director | QLD Director | SA |
Sydney CBD due to the already high rental rates, which are +61 418 587 835 +61 405 711 210 +61 401 773 814
major banks. ANZ is expected to shed 8,000 employees gary.longden@m3property.com.au michael.coverdale@m3property.com.au simon.hickin@m3property.com.au
over the next three years, CBA may cut 10,000 jobs over resulting in tenants downsizing or looking at fringe locations.
the next 3-5 years. High vacancy levels in Brisbane, Adelaide and Perth are
expected to keep rent growth low in these markets.
The risk to employment levels is not restricted
to banks with government, accounting, legal, Investment yields are set to stabilise in most CBDs over
telecommunications and some mining firms the three-year outlook. Perth is the main exception with a
looking at similar ways to reduce costs in a period further slight firming expected over the period. Investment
of technological advancement, combined with demand is likely to come from listed and unlisted funds. Jennifer Williams Katherine Tambouras Amita Mehra
challenging economic conditions. Foreign investors appear to be reducing direct investment National Director | NSW Research Analyst | NSW Research Director | VIC
into Australia, with APRA reporting that commercial +61 2 8234 8116 +61 2 8234 8103 +61 3 9605 1075
While much of the banks’ staff reduction will result in jennifer.williams@m3property.com.au katherine.tambouras@m3property.com.au amita.mehra@m3property.com.au
approvals, by value, in 2017-18 had fallen by 9.6%.
closures of branches in retail centres and main roads
rather than head offices, other sectors undertaking similar
CBD Office Outlook Sydney CBD Melbourne CBD Brisbane CBD Adelaide CBD Perth CBD
AnnAvg. Net Absorption p.a.^ 31,820m² 93,090m² 20,604m² 12,437m² 15,857m² Casey Robinson Zoe Haskett
Research Director | QLD Research Manager | SA
AnnAvg. Net Supply p.a.^ 73,894m2 124,913m2 13,849m2 67m2 18,966m2 +61 7 3620 7906 +61 8 7099 1807
casey.robinson@m3property.com.au zoe.haskett@m3property.com.au
Vacancy Rate^^ 6.3% 4.9% 11.8% 11.6% 18.5%
Avg. Prime Face Rent 2.4% gross 4.6% net 2.1% gross 2.4% net 2.2% net
Growth p.a.*
Prime Incentives # 25.0% 28.0% 26.0% 25.0% 42.9% m3property.com.au /m3property
Prime Yields # 4.69% 5.00% 5.88% 6.63% 6.30%
DISCLAIMER
^ Three years to December 2021; ^^ Forecast at December 2021; * Annual average three years to June 2022; # Forecast at June 2022. © 2019 m3property. Liability limited by a scheme approved under Professional Standards Legislation
This report is for information purposes only and has been derived, in part, from sources other than m3property and does not constitute advice. In passing on this
information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material
17 Australian Office | m3 Insight 2019 contains any statement as to the future, it is simply an estimate or opinion based on information available to m3property at that time and contains assumptions, which
may be incorrect. m3property makes no representation that any such statements are, or will be, accurate. Any unauthorised use or redistribution of part, or all, of this
report is prohibited.You can also read
