Who will rule our CBDs?
Ownership changing the realm of office
CBD OFFICE
First Half 2015
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CBD Office | Research & Forecast Report | First Half 2015
Concentration of ownership continues
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Our perspective – CBD office
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Contents
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700 Bourke Street, Docklands
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
Concentration of
ownership continues
Australian CBD office markets have seen significant change over the past
decade. Ownership has become increasingly concentrated with the top five
owners now controlling 25 per cent of total stock. In comparison, the number of
tenants continues to increase as the types of tenants change and their average
size declines.
By Nerida Conisbee
National Director | Research
nerida.conisbee@colliers.com
Over the next decade, we expect ownership levels to continue to concentrate with Australian institutional owners maintaining their dominance. Building stock will continue to improve as rental levels stabilise and the number of secondary buildings in CBDs declines as a result of residential development. Existing office development sites in Melbourne CBD will be absorbed and Brisbane and Sydney CBDs will start to run out of sites for new office development. Local Governments in these cities will need to have solutions as to how these cities can accommodate more office development.
Who owns the city?
Ownership of CBD offices is becoming more concentrated. Australian institutions still dominate ownership, now owning almost half of all CBD office buildings. The big increase has been in offshore ownership which increased from 9 per cent in 2009 to 14 per cent now. The largest reductions have been in private and Government ownership, a trend we expect to continue.
By CBD, the changes of ownership are more marked. In particular Perth and Brisbane CBDs which have traditionally had very high levels of private and Government ownership have seen rapid rises in institutional ownership (Perth CBD) and offshore ownership (Brisbane CBD). The most significant change was Perth CBD where institutional ownership jumped from 35 per cent of total stock to 54 per cent of stock over a five year time period.
In both Sydney and Melbourne CBDs, ownership by institutions declined with offshore ownership largely taking this share. The only city to see an increase in private ownership was Canberra which now has the second highest level of private ownership after Adelaide CBD. Government ownership is declining in all cities.
CBD OFFICE OWNERSHIP BY TYPE, 2009 AND 2014 (% OF TOTAL STOCK)
0 0.1 0.2 0.3 0.4 0.5 0.6
Institution Private Offshore Government Other
2009 2014
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A Colliers International publication
Not only is ownership becoming more concentrated amongst institutional and offshore groups, CBD office assets are also becoming increasingly concentrated amongst fewer owners. Whereas in 2009, the top 10 groups owned 29 per cent of total stock, in 2014, this has increased to 35 per cent.
DOMINANT OFFICE OWNERS BY CAPITAL CITY CBD 2014
2009 2014
1 Investa Dexus
2 ISPT The GPT Group
3 AMP Investa
4 The GPT Group ISPT
5 Charter Hall AMP
6 Dexus Charter Hall
7 Brookfield Brookfield
8 Stockland Cbus Property
9 Lend Lease QIC
10 Queensland State Government Lend Lease
All of the current top 10 owners have increased their CBD office market share over the past five years however the biggest increases have been Dexus and The GPT Group. This is attributable to organic growth in portfolios, as well as the CPA takeover. These two groups now own 11% of total CBD office stock around Australia. Today ISPT, Lend Lease and AMP have a similar market share to that which they had in 2009.
By capital city, the group with the greatest market share in 2009 was Queensland State Government which owned 11.6 per cent of total stock in Brisbane CBD in that year, a situation which changed dramatically in 2013 when the Government sold down
their portfolio. The GPT Group now has the highest market share in an individual city with an 11.2 per cent share of Melbourne CBD. There are no other groups with more than 10 per cent market share in an individual city. Dexus has the largest share in Sydney CBD, Brookfield Multiplex in Perth CBD, Capital Airport Group in Canberra, QIC in Brisbane CBD and SA Government in Adelaide CBD.
Is it possible to control rents with a market share of a CBD at levels greater than 10 per cent? It is unlikely. Broadly, monopolistic pricing is generally considered to be possible at market shares above 25 per cent. This analysis does however suggest that as a group, the top 10 owners now have a greater influence on the market than they have had previously. In particular, the top five owners comprising: Dexus, The GPT Group, Investa, ISPT and AMP; now have almost a 25 per cent share of CBD office markets. Although there does not appear to be a monopoly forming, an oligopoly is possible.
The recent announcement of the potential sale of the Investa real estate platform will lead to a significant change in ownership levels in Australian CBDs. Investa currently own just over 5 per cent of CBD office stock, with higher shares in Sydney and Brisbane CBDs. A potential purchase, by either Dexus or The GPT Group will increase these groups market share to above 10 per cent nationally and to potentially above 16 per cent in individual CBDs.
Who owns the pipeline?
Seven groups dominate the pipeline of CBD office development, accounting for 50 per cent of projects either under construction, or mooted.
Lend Lease has the highest share, controlling just over 14 per cent of upcoming development largely attributable to Barangaroo. Mirvac is second with 7.3 per cent of all upcoming development. Mirvac has significant pipeline in Melbourne CBD owning 20 per cent of upcoming development. Once complete this will bring Mirvac into the top ten owners of CBD offices in Australia.
PERCENTAGE OF TOTAL DEVELOPMENT PIPELINE IN AUSTRALIAN CBDS (UNDER CONSTRUCTION AND MOOTED)
Lend Lease 14.1% Mirvac 7.3% Brookfield 6.9% ACT Government 6.2% Charter Hall 5.8% Cbus 5.1% Walker Corporation 4.6%
By capital city, the dominant owners of developments sites are Charter Hall (Adelaide CBD), ISPT (Brisbane CBD), ACT Government (Canberra), Mirvac (Melbourne CBD), Brookfield (Perth CBD) and Lend Lease (Sydney CBD).
Unit 1, 60 Hindmarsh Square, Adelaide
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
Who occupies the city?
Not only is ownership consolidating but tenant types are also showing less diversity compared to previous decades. Although the rate of change is far slower than ownership changes with noticeable changes happening over a 20 year time period. AUSTRALIAN CBD OFFICE TENANCY MIX 1995
Agriculture and Mining Manufacturing
Wholesale and Retail Trade Transport, Postal and Warehousing Business Services Information Media and Telecommunications Finance and Insurance Government Other 2% 2% 8% 5% 14% 5% 19% 17% 28%
Source: Deloite Access Economics and Colliers Edge
AUSTRALIAN CBD OFFICE TENANCY MIX 2015
2% 1% 6% 2% 23% 5% 18% 18% 24%
Agriculture and Mining Manufacturing
Wholesale and Retail Trade Transport, Postal and Warehousing Business Services Information Media and Telecommunications Finance and Insurance Government Other
Source: Deloite Access Economics and Colliers Edge
The main change in our CBDs is the growing importance of business services. In 1995, business services comprised less than 15% of all occupiers but are now edging close to a quarter of all space. This growth has primarily come at the expense of wholesale and retail trade, transport, postal and warehousing and manufacturing. The declines in these sectors have been driven by a number of factors including a movement of these occupiers to metro locations, a decline in employment more generally and a shift of many functions from in-house to out-sourced (e.g. legal, accounting, graphic design).
With the move to a higher number of business services, the average size of new tenants has been reducing. The size of the average lease signed in our CBDs over the past three years has been 30 per cent lower than in the preceding three years. Changes in the way that organisations work (e.g. activity based working) is also likely to be a contributing factor here although data on workspace ratios suggests that change in tenant type is having a greater influence.
100 Pirie Street, Adelaide
Managed on behalf of 100 PS Management Pty Ltd
AUSTRALIAN CBD OFFICE – AVERAGE NEW TENANCY SIZE, 2010-2014 0 200 400 600 800 1,000 1,200 1,400 2010 2011 2012 2013 2014 Av er ag e Te na nc y m ²
Source: Colliers Edge
The end of metro markets?
Being in a central location is consistently the most important factor for office tenants in every Office Tenant Survey that Colliers International has undertaken. In Australia, this generally means being located in a CBD market due to the radial nature of our public transport and road systems.
Over the past decade, there has been very little decentralisation in most capital cities with the exception of Sydney CBD and Brisbane CBDs. In Sydney CBD the relatively low availability of new space led to strong growth in Sydney metro markets and affordability issues played out in Brisbane.
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A Colliers International publication
In 2014, centralisation of tenants was a key feature in Sydney and Melbourne CBDs. In total, 21 tenants looked to centralise in Sydney and six in Melbourne. Tenant enquiry also shows a divergence in enquiry levels between metro and CBD locations in 2014.
NUMBER OF TENANT ENQUIRIES BY LOCATION
0 50 100 150 200 250 300 350 400 450 500 2009 2010 2011 2012 2013 2014 Nu m be r of e nq ui rie s Melbourne CBD Melbourne Metro 0 50 100 150 200 250 300 350 400 450 500 2009 2010 2011 2012 2013 2014 Nu m be r of e nq ui rie s Sydney CBD Sydney Metro
Source: Colliers Edge
Although the drivers to move into a CBD location are different for every occupier, for many, cost is a major consideration. CBD markets are currently offering many low cost options for occupiers. Other attractive considerations include the cultural change that a CBD move can provide and an uplift in amenity. The other driving factor has been strong demand for residential. The conversion opportunities presented by many metro office buildings have risen as a result of this demand, coupled with favourable land use zonings leading to withdrawl of office stock. In addition many sites previously zoned commercial have been converted to residential sites, also reducing the pipeline.
Although it is not the end of metro markets, the affordable nature of Australian CBDs is likely to lead to improved demand for CBD stock relative to metro in the short term.
CBD residential development changing our CBD
office markets
An unprecedented level of residential development is now occurring in our CBDs. In Melbourne CBD more than 20,000 apartments are either under construction or have planning approval. In Sydney CBD the wave of development has just begun with more than 5,000 apartments expected to come online within the next five years.
One of the major impacts of this is the removal of ageing stock from the market as existing office buildings are either converted or demolished to make way for residential developments. At present, the levels are still relatively low with Sydney CBD currently the highest with 21 per cent of C and D Grade stock currently being converted. We consider it unlikely that the demand for residential development sites will completely take up all secondary space. There are a number of reasons for this including lack of suitability for many of the buildings and sites, planning restrictions and fragmented ownership.
SECONDARY OFFICE STOCK CONVERTED TO RESIDENTIAL, 2015 (% OF STOCK) 12% 21% 16% 88% 79% 84% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Melbourne Sydney Brisbane
Absorbed by Residential Development Remaining C and D Grade Stock
Source: Colliers Edge
1 Martin Place, Sydney
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
CBD residents typically do the majority of their retail shopping within the CBD and hence more apartment development is a positive for retail demand including both discretionary and non-discretionary retailing. More retail also makes a CBD more attractive for office occupiers. Overwhelmingly therefore we consider that strong resident population growth within our CBDs is a positive for office markets.
Beyond Barangaroo and Docklands.
Do we have enough sites?
REQUIRED AND PLANNED CBD OFFICE SPACE, 2014-2024 (SQM) 555,360 882,579 331,004 300,795 158,915 175,826 605,650 555,444 374,303 400,975 207,918 425,469 m² 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Sydney CBD Melbourne CBD Brisbane CBD Perth CBD Adelaide CBD Canberra Planned Required
Source: Colliers Edge
At a national level, approximately 2.5 million sqm of office space will be required over the next decade. As there is currently 2.6 million sqm of space either under construction or mooted, this
is fairly evenly balanced. The main issue however is that most of the space will be required in Sydney, Melbourne and Brisbane CBDs. In the case of Melbourne CBD, sites are likely to run out in around seven years. Sydney and Brisbane CBDs will be close to capacity within the decade. Capacity issues are far less problematic in Canberra, Adelaide CBD and Perth CBD. Planning has a major influence on capacity in Sydney CBD where changes in planning controls will allow for greater office development. This could include allowing for higher buildings, greater site consolidation and building redevelopment. Another option to address capacity issues is to continue to expand our CBDs. Melbourne’s geography allows easily for this and within the next decade, it is likely that sites such as E-Gate, Federation Square East and Fishermans Bend will become destinations for major corporates. For Sydney CBD, the likely direction of development is southwards with a major redevelopment of Central Station considered the best option. An alternative option would be to continue to develop metro office markets and push tenants to decentralise. This is likely to happen in markets such as Sydney and Brisbane CBD if rents reach levels similar to before 2008 however we do not consider that growth will be as strong in these markets as they have historically. Given site availability in the Melbourne CBD, decentralisation will continue to remain low.
Level 1, 23-45 Centreway, Mount Waverley
TRENDS TO WATCH IN 2015
2015 TOP DRIVERS OF TENANT DEMAND
TOP 3 COUNTRIES INVESTING IN AUSTRALIAN CBD OFFICE
LARGEST INVESTMENT TRENDS OF 2014
2014 ENQUIRY LEVELS BY CAPITAL CITY
Sale of $9 billion Morgan Stanley-owned Investa real
estate platform Biggest Sale CBW (181 William Street, Melbourne) $608.1m Decline in gap between prime and
secondary yields Most active purchaser² The GPT Group New sources of capital from offshore, particularly Japan
and South Korea Highest Yield¹ AM-60, Brisbane at 9.1% Australian pricing relative to other regions Most active offshore purchaser² The Blackstone Group CBD apartment development and sales levels
Lowest Yield¹ 52 Martin Place,
Sydney at 5.4% Australian
investors moving offshore Most active seller²
Cbus Property Changes to US tax law (FIRPTA) Largest takeover Commonwealth Property Office Fund
by CPPIB, DEXUS and The GPT Group
¹ Includes sales over $100m, where initial yield publically stated ² Excluding CPA and Australand takeover
Increased availability and cost of debt Most active offshore seller² GIC 1 2 3 5 7 8 4 6
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FIRST HALF 2015
CANBERRA 274,850 ADELAIDE 141,381 PERTH61,9612013
2014
CHINA SINGAPORE USA CANADA SINGAPORE USA SYDNEY 855,803 BRISBANE 164,333 MELBOURNE 627,980SYDNEY CBD TO SHOW STRONGEST GROWTH IN 2015
SYDNEY ADELAIDE MELBOURNE PERTH BRISBANE CANBERRA Continued evolution of flexible/liquid space
3
More green spaces
1
Less car parking, more bike spaces
2
Greater precinct amenity5
Greater centralisation of tenants6
Data driven design
4
A Grade net effective rents
$361 $298 $291 $261 $314 $389 $316 $297 $262 $451 $371 $290 2014 2015 7.2% 6% 2% 0.3% -17.7% -7.6%
A GRADE YIELD FORECAST TO COMPRESS
AND SOFTEN IN VARIOUS CITIES
2011 2012 2013 2014 2015 (f) CANBERRA MELBOURNE 8.25% 8.3% 8.2% 8.1% 7.9% 7.9% 8.28% 8.16% 7.5% 7.8% 7.6% 7.0% 7.4% 7.3% 7.1% 7.0% 7.4% 7.0% 7.95% 7.88% SYDNEY BRISBANE ADELAIDE PERTH 7.4% 7.1% 7.1% 7.5% 7.5% 7.3% 6.8%6.6% 7.3% 7.3%
TRENDS TO WATCH IN 2015
2015 TOP DRIVERS OF TENANT DEMAND
TOP 3 COUNTRIES INVESTING IN AUSTRALIAN CBD OFFICE
LARGEST INVESTMENT TRENDS OF 2014
2014 ENQUIRY LEVELS BY CAPITAL CITY
Sale of $9 billion Morgan Stanley-owned Investa real
estate platform Biggest Sale CBW (181 William Street, Melbourne) $608.1m Decline in gap between prime and
secondary yields Most active purchaser² The GPT Group New sources of capital from offshore, particularly Japan
and South Korea Highest Yield¹ AM-60, Brisbane at 9.1% Australian pricing relative to other regions Most active offshore purchaser² The Blackstone Group CBD apartment development and sales levels
Lowest Yield¹ 52 Martin Place,
Sydney at 5.4% Australian
investors moving offshore Most active seller²
Cbus Property Changes to US tax law (FIRPTA) Largest takeover Commonwealth Property Office Fund
by CPPIB, DEXUS and The GPT Group
¹ Includes sales over $100m, where initial yield publically stated ² Excluding CPA and Australand takeover
Increased availability and cost of debt Most active offshore seller² GIC 1 2 3 5 7 8 4 6
Our perspective
CBD OFFICE
AUSTRALIA
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FIRST HALF 2015
CANBERRA 274,850 ADELAIDE 141,381 PERTH61,9612013
2014
CHINA SINGAPORE USA CANADA SINGAPORE USA SYDNEY 855,803 BRISBANE 164,333 MELBOURNE 627,980SYDNEY CBD TO SHOW STRONGEST GROWTH IN 2015
SYDNEY ADELAIDE MELBOURNE PERTH BRISBANE CANBERRA Continued evolution of flexible/liquid space
3
More green spaces
1
Less car parking, more bike spaces
2
Greater precinct amenity5
Greater centralisation of tenants6
Data driven design
4
A Grade net effective rents
$361 $298 $291 $261 $314 $389 $316 $297 $262 $451 $371 $290 2014 2015 7.2% 6% 2% 0.3% -17.7% -7.6%
A GRADE YIELD FORECAST TO COMPRESS
AND SOFTEN IN VARIOUS CITIES
2011 2012 2013 2014 2015 (f) CANBERRA MELBOURNE 8.25% 8.3% 8.2% 8.1% 7.9% 7.9% 8.28% 8.16% 7.5% 7.8% 7.6% 7.0% 7.4% 7.3% 7.1% 7.0% 7.4% 7.0% 7.95% 7.88% SYDNEY BRISBANE ADELAIDE PERTH 7.4% 7.1% 7.1% 7.5% 7.5% 7.3% 6.8%6.6% 7.3% 7.3%
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A Colliers International publication
The second half of 2014 witnessed the green shoots of leasing market recovery continue. Leasing volumes were up, vacancy improved and incentives stabilised. Demand across the CBD has picked up from a variety of tenants with net positive absorption of over 54,000sqm over the six months to 1 January 2015. The highest incentives have been reigned in and in some cases incentives have fallen, particularly for quality B Grade stock and smaller premises, with signs that landlords are beginning to push back on tenant demands.
Vacancy in the Midtown precinct tightened in the second half of 2014 assisted in part by recent Colliers International brokered deals in 2 Park Street and 135 King Street, a lack of new supply and pressure for residential conversions of older office stock. The Core remains popular with financial services. Ongoing development in this precinct and large commitments by the likes of Challenger and the Macquarie Group will cement the role of the Core going forward. The Western Corridor is subject to significant public and private capital investment over the next four years and is expected to be the stand out performer in 2015.
Over the next 12 months we expect to see deepening recovery in the leasing market, particularly for quality A and B Grade space, off the back of stable demand and constrained supply. Centralisation of tenants from metro locations will remain a feature given the value proposition of the CBD to tenants and staff alike. Consultancies, marketing, communications, business services and IT&T tenancies will expand and take more space, leading to a gradual improvement in leasing market conditions over time. Capital markets outperformed in the second half of 2014 with strong demand from domestic and overseas buyers in transactions worth $1.8 billion. The two-tier investment market which emerged in 2013 persists, comprising pure commercial assets on the one hand and those with residential upside on the other.
Big ticket transactions in the second half of 2014 comprised 52 Martin Place, selling for $555 million in July, and 175 Liverpool Street which transacted for $392.75 million in November. 52 Martin Place was acquired by REST Industry Super at a low 5.6
per cent yield reflecting a 33-year WALE and strong covenant to government tenants. GIC sold 175 Liverpool Street to Hong Kong listed developer Shimao Property for $392.75 million on the basis of residential conversion potential at a yield of approximately 7 per cent. These two sales exemplify the two separate investment rationales which underpin the CBD market.
The strength of the investment market remains decoupled from leasing fundamentals although improving fortunes in the latter will help to bring the markets more in line over time. Purchasers who intend to hold assets for the long term are less concerned with short-term leasing market fluctuations, but even if yields stabilise improving leasing conditions and associated capital value uplift is good news for landlords. That said we expect the strong investment landscape to endure in 2015 with scope for moderate yield compression over the next six to 12 months.
Leasing market recovery solidifies
SYDNEY CBD OFFICE
First Half 2015
Research and
Forecast report
35 Clarence Street, Sydney
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
Leasing market
Activity up as incentives plateau
Sydney CBD recorded a 1 percentage point fall in vacancy over the six months to 1 January 2015 to reach 7.4 per cent. Leasing fundamentals strengthened with net face rents trending upwards, incentives stabilising or in some cases tightening and anecdotally a pick-up in demand recorded by our leasing team. The Colliers International Office Demand Index shows enquiry for the December 2014 quarter up 75 per cent compared to the December 2013 quarter. The greatest demand was for space of 3,000sqm and above, with this market up a record 173 per cent on the December 2013 quarter.
The number of CBD deals brokered by Colliers International and the volume of floorspace taken both increased in the second half of 2014 compared to the first half, by 23 per cent and 32 per cent respectively. That said, the 31 per cent average incentive across the Sydney CBD remains historically high. A slight tightening of incentives for good quality B Grade and smaller tenancies across the CBD, on a case by case basis, has emerged reflecting strong demand, fewer quality options and the depth of the market for sub -300sqm suites.
SYDNEY CBD A GRADE INCENTIVES VS VACANCY RATES
0% 2% 4% 6% 8% 10% 12% 14% 0% 5% 10% 15% 20% 25% 30% 35% Ja n-05 Ju l-0 5 Ja n-06 Ju l-0 6 Ja n-07 Ju l-0 7 Ja n-08 Ju l-0 8 Ja n-09 Ju l-0 9 Ja n-10 Ju l-1 0 Ja n-11 Ju l-1 1 Ja n-12 Ju l-1 2 Ja n-13 Ju l-1 3 Ja n-14 Ju l-1 4 Ja n-15 A-g ra de v ac an cy ra te Av er ag e A-gr ad e in ce nt iv es A-Grade Incenitves A-Grade Vacancy
Source: PCA OMR/Colliers Edge
Average net effective rents pushed upwards to reach $432/sqm for A Grade floorspace in the second half 2014. This was due
5 Martin Place, Sydney
Leased on behalf of DEXUS Property Group & Cbus Property
to incentives but increasing net face rents representing a solid 6.6 per cent increase over the last year. This growth was not distributed evenly across the CBD with the Core and Midtown recording the strongest rental increase and the Southern precinct remaining broadly static.
Smaller business drives demand growth
The majority of leasing activity in the second half of 2014 was attributable to consulting, IT&T, business services, marketing and communications related tenancies. These are services that companies typically outsource so their expansion is a positive indicator of economic conditions; however they also tend to be small occupiers of space. Encouragingly the larger local banks such as CBA and Westpac have requirements in the market reflecting their strong domestic performance. To date we have not seen expansions in large investment banks such as UBS and Merrill Lynch which historically were a major source of premium absorption, given that these are aligned with the international markets where there remains some concern.
The tenant flight to quality recognised in our previous RFR has started to crystallise. Examples include Holman Fenwick William relocating from 201 Elizabeth Street to 1 Bligh Street; Challenger moving from 255 Pitt Street to 5 Martin Place; and Boardroom relocating from 201 Kent Street to Grosvenor Place. Centralisation of tenants continues to occur due to choice, the attractive deals and amenity on offer in Sydney CBD.
Martin Place is enjoying a renaissance. For the first time in a long time large new floorplates are available and savvy tenants are capitalising on this opportunity. One Martin Place is leasing well with the Macquarie Group retaining space and DLA Piper, LinkedIn and the Australian Prudential Regulation Authority committing, although 20 Martin Place is still seeking commitments.
SYDNEY CBD OFFICE
INDICATOR CURRENT 12 MONTHS
A Grade gross face rents $627 3.5%
A Grade net effective rents $389 6.5%
A Grade incentives 31% 29%
A Grade yields 7.1% 7.0%
A Grade capital values $9,007 $9,335
A Grade vacancy rate 8.0% 6.2%
Total market vacancy rate 7.4% 7.0%
Supply additions (m²) 42,600 296,854
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A Colliers International publication
Western corridor the one to watch
A modest tightening of market conditions to benefit landlords is anticipated in 2015 as business confidence improves and consultancy, business services, IT, marketing and communications tenancies expand and take more space. Over the next 12 months slow improvements in incentives should occur on a case by case basis but there will be no dramatic fall given that the market for tenants remains highly competitive and space is spread out between a number of landlords.
The Western Corridor will be the outperformer in 2015 off the back of significant space occupiers and investment which will underpin improved confidence and sentiment. In December Insurance Australia Group (IAG) committed to 33,000sqm in Darling Park. IAG will be consolidating from three CBD locations, replacing the existing tenant PricewaterhouseCoopers (PwC) who will move to Barangaroo. Other major space occupiers such as Marsh Mercer and Suncorp are expected to make commitments to the Western Corridor over the course of 2015.
The premium market will continue to offer tenants looking for flight to quality options with significant vacancies in Grosvenor Place, Aurora Place and Governor Macquarie Tower. Many of the most attractive A Grade assets are nearing full capacity and the tightly held nature of the market should encourage tenant activity. Demand will be pushed into the Core at the prime end.
Investment market
Local institutional buyers still dominate
The Sydney CBD investment market has gone from strength to strength, with strong interest from domestic and overseas
buyers in the second half of 2014. The Colliers International sales database recorded $5 billion worth of deals exchanging in 2014, some 70 per cent greater by value than 2013 and 28 per cent greater than 2012. Whilst foreign buyers have been acquiring some high profile assets, most have acquired assets suitable for residential redevelopment whereas our data indicates that the Sydney CBD investment market is still dominated by local players who accounted for 60 per cent of all transactions by value. SYDNEY CBD INVESTMENT SALES BY BUYER TYPE
0.0 1.0 2.0 3.0 4.0 5.0 6.0 2010 2011 2012 2013 2014 Va lu e of s al es ( $b n) Domestic Offshore $4.95 bn $3.49 bn $2.86 bn $2.62 bn $2.91 bn
Source: Colliers Edge/RCA
Two-tier investment market continues
The second half of 2014 saw the continuation of Sydney CBD’s two-tier investment market. This comprises both pure commercial assets and properties offering a higher and better use for residential or hotel/ serviced apartment accommodation.
Sizeable sales prices are evident for assets with residential upside which far exceed their commercial book value. This is despite the degree of planning risk and often long lease periods to gain vacant possession prior to enabling conversion. Many overseas buyers view such acquisitions as an opportunity to gain a foothold in the Australian market, being less motivated by monetary return relative to value. They are prepared to invest based on a solid rental income, knowing that end residential sales values will be high. 175 Liverpool Street was acquired in November by Shimao Property from GIC for $392.75 million at a circa 7 per cent yield. Telstra recently leased an additional 6,600sqm in this building and State and Federal government tenants are in occupation so it will take some time for conversion to be realised, demonstrating the willingness of investors to play a long term investment game. At the time of writing the Dalian Wanda Group’s acquisition of Gold Fields House for $415 million had just exchanged. This is indicative of the persisting appetite for residential conversion opportunities in Sydney CBD from overseas parties.
There remains good interest in pure commercial assets from both onshore and offshore groups, particularly if there is some value add available through refurbishment or repositioning. The purchase of 52 Martin Place by REST Industry Super completed in July reflecting a 5.6 per cent yield and a strong capital value of $14,122/sqm. There was strong on and offshore purchaser 2 Park Street, Sydney
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
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For further information please contact:
Tom Duncan
Manager | Research | Tel +61 2 9257 0327
tom.duncan@colliers.com
275 Kent Street, Sydney
Valued on behalf of Blackstone
demand for this asset attracted by the core location, quality, refurbishment apartments and strong lease covenants with WALE in excess of 30 years. With a sales value of $555 million this represented the greatest value Sydney CBD sale this year and the third greatest ever in the market. Interest in A Grade assets has been strong, including the Colliers International brokered 35 Clarence Street deal. This saw Challenger Life purchase this asset for $137.1 million on a 6.9 per cent yield.
Yields were subject to moderate compression over the second half of 2014 bringing premium yields in the Core to 5.9 per cent and A Grade to 6.3 per cent on average, although subject to variability depending on the asset. This equates to a fall of 0.1 and 0.2 percentage points respectively. Demand for B Grade assets has seen a 40 basis point sharpening of yields over the last six months based on sales evidence.
Strong investment outlook
We expect to see a continuation of strong sales conditions over the next 12 months in both investment market tiers. Colliers International is continuing to register a high level of interest from Asian and European parties for Sydney CBD assets, a mixture of super high net worth individuals, REITs and pension funds. Domestic interest from institutions remains. The main limitation on sales activity is a lack of modern stock for purchase in the CBDs tightly held market.
Portfolio and merger and acquisition (M&A) sales featured prominently in 2014 with CPA, Arena, Lend Lease Core Plus and Leightons representing significant ownership transfers. 2015 will see more sales of this nature due to sheer weight of capital from
overseas investors who are prepared to pay a premium to access scale quickly. This includes the Mirvac portfolio of five non-core office assets across three cities, including 210 and 220 George Street in Sydney CBD which Colliers International is marketing.
Supply, vacancy
and demand
Falling vacancy across the board
The latest data from the Property Council of Australia indicates the Sydney CBD vacancy rate declined for the second consecutive six month period to 7.4 per cent across all grades. This is below the 10-year average of 8 per cent.
Whilst the scale of residential conversions in the CBD is significant and will undoubtedly impact positively on leasing fundamentals, withdrawals will be staggered over a protracted time. This will water-down the immediate impact on vacancy rates in the context of the usual ebb and flow of withdrawals and absorption. The conversion trend is largely a B Grade phenomenon. Whilst it will force tenants into the market with positive implications for A Grade stock, the premium grade market which is feeling the most pain will be largely unaffected in the short term. Over time however the premium grade buildings stands to benefit from tenants pushing up in quality.
Strong supply pipeline
A test for Sydney CBD will emerge in the second half of 2015 with the completion of Towers 2 and 3 in Barangaroo and the resultant backfill. Approximately 229,000sqm of new build and refurbished office floorspace is due for completion in 2015 of which 57 per cent is pre-committed. This includes new floorspace at 5 Martin Place, 20 Martin Place, 225 George Street and 10 Shelley Street in addition to the first stages of Barangaroo.
There is some concern about the CBD leasing market in 2016 and beyond due to a sizeable development pipeline equivalent to over 611,000sqm of office floorspace. The leasing market will continue to recover over the next two years and it is likely that this new supply will complete in a healthier leasing environment. Sydney CBD office supply remains fairly inelastic, restricted by physical space, the challenge in amalgamating sites and obtaining timely planning approvals. As such the medium to long term outlook for owners is considered positive although vacancy is likely to push upwards as new developments come online prior to growth in demand absorbing the slack.
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A Colliers International publication
Once again, Melbourne witnessed a record year of CBD office investment sales, with volumes of just under $3.46 billion recorded, easily surpassing the 2013 figure of $2.36 billion. This is largely due to cyclical factors in not only Australian, but global capital markets, with the greatest ever volume of buy-side capital coinciding with record-low debt funding costs. The past year has cemented Melbourne’s position as a focus for international investors. Both macro and microeconomic factors contribute to this, such as strong historic and forecast population growth, as well as reasonable economic conditions despite higher than average unemployment. On the micro side, Melbourne offers a strong total return performance and a yield premium to Sydney that makes Melbourne a focus for active offshore core investors.
The flagship offering of 2014 was Cbus Property’s dual offering of ‘CBW’ (550 Bourke Street & 181 William Street) and 700 Bourke Street. These properties represented the largest ever core offering in Australia, and CBW was the largest ever office investment sale in Melbourne ($608.1 million) while 700 Bourke Street was the largest ever single-tenant office transaction in Australia ($433.5 million). Colliers International proudly marketed and sold both properties.
On the buy-side, domestic institutions - in particular wholesale funds and direct super funds - acquired 65 per cent (by sales volume) of the property traded in 2014 for a combined total of $1.88 billion. GPT Wholesale Office Fund was the most active purchaser acquiring 655 Collins Street, 750 Collins Street, 2 Southbank Boulevard (50 per cent) and CBW (50 per cent). The largest acquisition by a single entity was AMP Capital Wholesale Office Fund’s purchase of 700 Bourke Street for $433.5 million. Listed REITs were the most prolific sell-side class, divesting nine office buildings for a total volume of $1.32 billion. The motivation behind the majority of these sales was the divesting of non-core stock, however some (321 Exhibition Street as an example) were capitalising on favourable off-market buy-side approaches. Asian investors do remain active in Melbourne, however, in 2014 it was predominately developers acquiring secondary major office buildings for conversion of use to residential/hotel. Major examples of this trend were Fragrance Group’s acquisition of 555 Collins Street for $78 million and the sale of 350 Queen Street off-market to Chinese investors for $130 million.
Melbourne now boasts a long list of international institutional owners, with a total of approximately $3.5 billion of major CBD office buildings being owned by investors originating from Germany, Switzerland, UK, Sweden, South Africa, US, Canada, Singapore, Korea, Malaysia and China. Asia remains a key portion of their allocations to direct property and Melbourne is a particularly popular city within the Asian and Australian strategy. Whilst all will continue to be net buyers, activity is of course
Demand for CBD investment stock to
continue unabated
2 Riverside Quay, Southbank
Sold on behalf of Mirvac
MELBOURNE CBD OFFICE
First Half 2015
Research and
Forecast report
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
dictated by various political, legal and return factors that regularly change in Australia, other global investment destinations and of course the investors’ country of origin.
Leasing demand
continuing to
meet supply
One of the largest deals to occur in 2014 was brokered by Colliers International at 700 Collins Street, Docklands. Metro Trains Melbourne, the operator of Melbourne’s train network, leased 7,577sqm on space of levels 15-17. This deal is significant in many ways, as it was the first major backfill deal to be completed in Docklands, and was a strong test of the market. Metro Trains Melbourne saw an opportunity to reuse the existing fitout, as well as take advantage of relatively generous market incentives that are currently on offer. The operator of Melbourne’s tram network, Yarra Trams, has also committed to 5,500sqm of space at 555 Bourke Street.
These two deals are strong positives for net absorption in the Melbourne CBD, as Yarra Trams will mostly be coming out of South Melbourne, while most of the space that Metro Trains Melbourne will be vacating at 1 Spring Street and 80 Collins Street, the latter of which has been committed to by State Government departments. This means that there won’t be a large backfill legacy that can occur when a major deal is done in the CBD.
Incentives here to stay in the medium term
Despite our contention that the vacancy rate will not blow out to double figures in 2015 or beyond, we still expect that incentives for Melbourne CBD office space will remain at current levels for the remainder of the year. While demand continues to be reasonable, supply levels are remaining high which will mean landlords will need to remain competitive with incentives in order
to attract major tenants. That being said, we do think incentives 171 Collins Street, Melbourne
Leased on behalf of Cbus Property & Charter Hall
have reached their maximum levels, with very few owners willing to offer over 35 per cent, given that IRRs for institutional grade assets are already being stretched in the current investment market.
The story is much the same for face rents, with only very moderate growth occurring over the last 6 months of 2014. Still, A Grade Face rents are at their highest levels ever, while Premium Grade rents are about $20/sqm below their peak levels in 2012. Maintaining Face Rents is of significant importance for many institutional owners, as annual rental growth on any deals brokered is measured off the Face Rent, giving the owners guaranteed future income levels that in some cases make up for the incentive that was required to sign the tenant.
Secondary market activity on the rise
The secondary office market is seeing a lot of activity at present, driven predominantly by lease expiries which is encouraging tenants to look for alternative options. Colliers International is aware of over 200,000sqm of secondary grade office space that is occupied by tenants whose leases are expiring over the next three years. Many of these tenants are fully aware of leasing market conditions and opportunities that abound to upgrade to newer, higher grade space, given the relative affordability of A Grade space in Melbourne compared to other Capital City CBDs. Some large secondary grade deals have already occurred, with Central Queensland University (CQU) taking around 8,000sqm of space at 120 Spencer Street, and Monash University taking 6,570sqm of space at 271 Collins Street.
MELBOURNE CBD OFFICE
INDICATOR CURRENT 12 MONTHS
A Grade Net Face Rents $440 4.0%
A Grade Net Effective Rents $298 6.0%
A Grade Incentives 31% 30%
A Grade Yields 6.8% 6.5%
A Grade Capital Values $6,483 $6,956
A Grade Vacancy Rate 8.5% 10.1%
Total Market Vacancy Rate 9.1% 9.2%
Supply Additions (m²) 118,329 121,644
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A Colliers International publication
These deals also highlight the growing importance of the education sector to the Melbourne CBD market. The education sector also seems to be expanding further, with the recent announcement of the opening of a new secondary college in the CBD to cater predominately for overseas students. If this venture is successful, it has the potential to create a new base of demand for secondary grade space.
MELBOURNE CBD OFFICE LEASE EXPIRIES
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 2015 2016 2017 m 2 Prime Secondary
Source: Colliers Edge
Investment market
Whilst cap rates for core office stock appear to be at or near the previous lows of 2007, the conditions of capital markets still demonstrate significant net demand, indicating cap rate compression is not yet at an end. Furthermore, cap rates for secondary CBD office stock and metropolitan markets remain relatively attractive and are still a reasonable distance above previous lows. The ability to reposition, lease up, upgrade or completely change a secondary asset’s use to a higher and better use are often the buy side factors that motivate private buyers. The above factors combined with slowly improving leasing markets and an ongoing low interest rate environment (including the prospect of further cuts to the Reserve Bank cash rate) point towards another full year of cap rate compression in 2015. Investment stock supply is expected to come from similar channels in 2015 as it did in 2014. Domestic institutions will inevitably continue to divest non-core stock, and Melbourne’s extensive development pipeline will continue to shape both our streets and core transactions and opportunistic owners will no doubt capitalise on aggressive buy-side approaches. Furthermore, Melbourne is blessed with a much higher proportion of A Grade stock than any other CBD market, (49 per cent compared to 37 per cent in Sydney and 40 per cent in Brisbane) and it is this stock which is typically transacted on by institutional owners. While Premium Grade stock is highly sought after, it is also tightly held, particularly in Melbourne.
Supply levels are anticipated to be met with a much higher level of demand. Wholesale and retail markets on the buy-side are
well-fuelled both domestically and offshore and as such there are deep buyer markets for products of all types. There has been extensive buy-side capital for core stock for some years now and it is the core-plus markets that are forecast to activate further in 2015 as the improved leasing markets drive investor returns. MELBOURNE CBD OFFICE SALES VOLUMES
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 2010 2011 2012 2013 2014 $A UD m
Source: Colliers Edge
Supply, vacancy
and demand
New supply met with good take up rates
In the first half of 2015, we expect that two new buildings will reach practical completion. The first being 567 Collins Street, the first Premium Grade building to be built in Melbourne since the
700 Bourke Street, Docklands
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
How else can we help you?Speak to one of our property experts today.
au.office@colliers.com
For further information please contact:
Anneke Thompson
Associate Director | Research | Tel +61 3 9940 7241
anneke.thompson@colliers.com
818 Bourke Street, Docklands
Sold on behalf of The GPT Group
early 1990s. 567 Collins Street is almost 80 per cent pre-committed, with two of the major tenants – Leightons and Jemena – coming from outside the CBD, so contributing positively to net absorption. The upcoming move of law firm Corrs Chambers Westgarth to 567 Collins Street, will leave some backfill at 600 Bourke Street, which will see a further slight rise in the Prime Grade vacancy rate come July 2015. The other major completion for the first half of 2015, assuming current timelines remain in place, is AGL’s new headquarters at 699 Bourke Street. Charter Hall’s new 27,000sqm development at 570 Bourke Street is also due to reach practical completion around mid year.
Vacancy rate still moderate, in the face of
increasing supply
The vacancy rate recorded for January 2015 has seen a minor uptick to 9.1 per cent, from 8.2 per cent in July 2014. The completion of 150 Collins Street, 70 per cent occupied by Westpac, has created a major backfill options in the CBD, being 16,000sqm of space at 360 Collins Street. The potential to expand the floors means up to 24,000sqm could be available.
The 47,000sqm 720 Bourke Street, new headquarters to Medibank, also reached practical completion in the second half of 2014, with 10,500sqm of remaining space in the building available for lease.
Over the six months to January 2015, an additional 87,795sqm of office space was added to total stock, and net absorption was almost 40,000sqm. This has left almost 50,000sqm of additional vacancy on the market, and is a strong indicator that incentives are going to remain at current levels for the remainder of the year.
Law firms dominating demand for prime
grade space
The traditional main driver of demand in the Melbourne CBD has been from the Professional Services sector – law firms and accounting firms. In 2015, this trend looks set to continue, with major firms in the legal sector currently on the hunt for the Prime Grade space in the Melbourne CBD. Known briefs out in the market include King & Wood Mallesons, Clayton Utz, Minter Ellison and Norton Rose. At least one of these requirements has the potential to be the major pre-commitment to kick start the next major new building in Melbourne.
One of the enduring strengths of the Melbourne CBD office market is the depth of demand available. Melbourne is not particularly beholden to any particular sector for office demand, unlike Brisbane and Perth who are heavily reliant on mining and
government services, and Sydney which is quite exposed to the financial services sector (although Sydney too is becoming more diverse with the emergence of the technology sector as a major occupier). Melbourne has seen an average of 130,000sqm of new supply enter the market each year for the past 10 years, and over this time vacancy has never reached double figures. Strong population growth is expected to be the key contributer to demand remaining solid over the coming supply cycle.
MELBOURNE CBD OFFICE MARKET VACANCY & ABSORPTION
9.2% -5.0% 0.0% 5.0% 10.0% 15.0% -50,000 0 50,000 100,000 150,000 To ta l M ar ke t V ac an cy R at e Si x M on th N et A bs or pt io n (m 2) Forecast
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A Colliers International publication
Throughout the first half of 2014, the Brisbane CBD office leasing environment faced difficult conditions. This was consistent with the state economy’s slow growth due to contraction within the resource and energy sector and rationalisation in the public sector leading to withdrawals, and subdued business confidence. As a consequence, high vacancy levels and weak tenant demand defined the office landscape.
In the second half of the year, incentives plateaued while rents stagnated and vacancy rates achieved record high levels. Meanwhile, available sublease space reduced notably as a result of tenants taking advantage of the attractive lease terms offered by landlords.
Despite these weak market indicators, there are tentative signs of a return to improved market conditions. Leasing activity has gained momentum and while the majority of the activity appears to have been a reflection of business consolidation, some business sectors have undertaken expansionary activity. Notably legal and financial firms have actively sought new and larger space and in some cases doubled their space requirements. However, late 2015 will see the new tranche of supply enter the market putting further upward pressure on vacancy rates and incentives. In particular, tenant movement into new development coupled with potential business consolidation is expected to broaden the sublease market.
Australian ten year government bond yields have dropped to record lows as global investors continue to seek low-risk assets amid concerns relating to deflation in Europe and the impact on low oil prices on energy and producer companies. Institutions are being driven to reweight portfolios with increased exposure to suitable property assets. Subsequently REIT’s and foreign entities have been driving the renewed activity in the Brisbane market. However, the volume of activity for prime assets has been constrained due to ongoing limited core asset availability.
Despite the PCA data showing net absorption to be negative, there are some signs of improvement for office demand in the Brisbane
Investors adopt a longer term approach
CBD. Employment data indicates that there have been gains in the property and business services sector. The expectation going forward for the Queensland public sector is for a moderate increase in employment with gradual growth projected after 2016.
According to Deloitte Access Economics, white collar employment growth will peak in 2015-16 as public sector begins to increase workforce particularly following the outcome of the State election. More encouraging news is that the LNG projects underway will delay the impact of the construction cliff with a surge in gas exports forecast from 2016 positively impacting the state’s revenue.
Leasing market
Leasing activity gains momentum
The bottom of the Brisbane CBD property cycle manifested during the second half of 2013 and first half of 2014. Net absorption was at historical lows with contraction in the mining and resources sector, the State Government’s accommodation strategy, along with backfill due to new development commitments accounting for negative net absorption. Coupled with this was the high vacancy notably in the B Grade market. During the second half of 2014, the market has been showing tentative signs of a return to improved conditions with the volume of transactions increasing.
BRISBANE CBD OFFICE
First Half 2015
Research and
Forecast report
BRISBANE CBD OFFICE
INDICATOR CURRENT 12 MONTHS
Average A Grade net face rents $522 $516
Average A Grade net effective rents $456 $451
Average A Grade incentives 33.5% 32.5%
Total market vacancy rate 15.6% 14.3%
Average A Grade yields 7.00% 7.50%
Average A Grade capital values $7,460 $6,880
Supply additions (m²) 0 0
Metro Office
CBD OFFICE
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CBD Office | Research & Forecast Report | First Half 2015
480 Queen Street, Brisbane
Leased on behalf of Grocon & DEXUS Property Group
2014 to around 50,000sqm in second half of 2014 representing take-up of new space and also withdrawals. The majority of sublease space on the market is now in the construction and infrastructure sector. However, the imminent completion of 480 Queen Street will result in an additional 32,000sqm pending as tenants will relocate to the new development upon its delivery in 2016. Thus, volatility in the sublease market is inevitable. Business contraction and consolidation along with tenant migration into new buildings will continue to contribute to fluctuations in the sublease market in the short term.
Investment market
Foreign exposure increases
Australian and offshore institutions dominated the Brisbane CBD office landscape in 2014. There was a rising trend in foreign investment representing 41 per cent of the total volume of investment sales for core assets. Investment managers, banking and holding groups from the USA, Malaysia and Singapore defined the offshore buyers.
Offshore groups tend to target assets with stable long term income profiles such as 50 Ann Street (State Law Building) fully leased to the State of Queensland with a WALE of 6.41 years. However more recently, there has been an increase in foreign The quantum of confirmed office space leased during 2014
amounted to 114,161sqm, representing nearly a doubling from the previous year, with the second half of the year accounting for around 45,000sqm of the transaction volume alone. The majority of activity was in the financial services sector within the A Grade
market(30 per cent). While many of these transactions were
as part of business consolidations, some business industries undertook expansion. Growth has been particularly strong in the legal sector, with CBP Lawyers, HWL Ebsworth and Shine Lawyers increasing their floor areas. Coinciding with this has been the increase in average floor area transacted during 2014, which rose to 880sqm.
BRISBANE CBD LEASE VOLUMES YTD
0 200 400 600 800 1000 1200 1400 0 20,000 40,000 60,000 80,000 100,000 120,000 2010 2011 2012 2013 2014 Av er ag e fl oo r a re a ( m ²) Le as in g V ol um es (m ²)
Leasing volume Average floor area
Source: Colliers Edge
Rental growth remains subdued
Premium and A Grade rents saw little to no uplift in the second half of 2014 with average incentives plateauing. While overall demand is expected to slowly strengthen, rental growth is likely to remain fairly flat for at least the next 12 to 18 months.
The prime market continues to be highly sought comprising a 70 per cent share of the leasing volume during 2014. The ongoing trend of flight to quality has not been as prevalent in Brisbane compared to Sydney or Melbourne, although there is more evidence of this occurring with tenants shifting to better quality premises in light of the competitive lease terms on offer. Tenant migration from Fringe to CBD locations has been a feature with BIS Industries, BVN Donovan Hill and Uniting Care consolidating and relocating to the CBD over the last six months given the affordability of the CBD in the prevailing soft leasing market. In contrast, the secondary market continues to be volatile experiencing high vacancy levels, capital investment pressures for asset refurbishment and competitive parameters to
secure tenants.
Vacancy rates increase while available sublease
stock falls
Despite overall vacancy rates increasing, the reduction in available sublease stock provides some indication that the market is beginning to show some correction transitioning away from a resources driven sector. Analysis indicates that available sublease space has reduced markedly from 86,000sqm in the first half of
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A Colliers International publication
transactions for secondary assets offering value proposition for the potential of capital appreciation. At the time of writing, Investa’s 363 Adelaide Street tower exchanged hands. The US private equity group, Valparaiso Capital Partners, acquired the secondary asset for $47.5 million and is planning its conversion into high end student accommodation. Further to the acquisition of secondary assets, 2014 saw an increase in foreign investment appetite for sites offering development potential
Pent-up underlying demand due to the lack of core investment grade stock on the market has seen investors take indirect approaches of acquiring funds such as development fund through and the portfolio purchase of REITs. LaSalle Investment Management acquired the Lend Lease Core Plus Portfolio comprising six office buildings in Sydney, Brisbane and Melbourne totalling around $285.5 million. This included 414 George Street in the Brisbane CBD along with Valley Metro and Transport House, and Abigroup House. With the continuing fall in the Australian dollar and the accommodative institutional debt markets, this may lead to further acquisitions in the Brisbane CBD, particularly as investors become more asset starved as a result of portfolio acquisition and limited new prime supply.
BRISBANE CBD OFFICE INVESTMENT SALES BY BUYER TYPE YTD 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 Private Foreign Institution Corporate Source: Colliers Edge/RCA
Capital flows supported
Last year the Brisbane CBD experienced weaker capital inflow for office investment sales. $872 million of office stock changed hands, which was a considerable reduction from the level of activity witnessed in 2013 ($2.5 billion). That said, a significant volume of transactions in the preceding year was due to the State Government’s sale of its commercial asset portfolio.
Investment markets are reacting to the recent weakness in the occupier market. Capital flows into commercial office has been concentrated into prime assets offering core style returns and reflective of lower risk. Despite the sizeable capital in the market, a lack of core assets and record spreads between bond
and yields does not indicate any evidence of yield tightening in Brisbane in the second half of 2014. Nevertheless, investor risk appetite continues as the yields on commercial property remain attractive compared to other asset classes. Although there is no compelling catalyst for a rapid rebound in the Australian economy, the low interest rate environment is expected to limit the risk for widespread falls.
Institutional investors have been active in the market with the Australian investment manager, Challenger Life, continuing its commercial property acquisition cycle with the purchase of 53 Albert Street. The A Grade asset with a strong lease profile was acquired from private company Hatham Holdings for $211.7 million. The property has a long term lease in place with State Government reflecting its status as long term and a safe investment, trading on an equivalent reversionary yield of 6.75 per cent.
Besides the desire to secure high yielding commercial assets particularly ones with longer WALEs or those that provide value proposition in light of their conversion potential, investors have also been on the hunt for commercial assets for business occupation. For example, the Royal Automobile Club of Queensland (RACQ) purchased an office tower at 60 Edward Street for $60 million from AMP Capital. RACQ had been searching the market for 12 months and sought to consolidate their three offices with the asset’s upcoming lease expiry suiting their requirements.
While the impact of leasing market fundamentals is likely to be initially neutral to yields, as demand improves, occupancy is expected to drive yield compression. Subsequently over time, improvements in the leasing market should translate into rental growth and a new wave of yield compression.
175 Eagle Street, Brisbane
