Perth CBD Office m3property Insight

June, 2019

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Office vacancy is expected to rise in 2019 in the Perth CBD office market, before falling again over 2020-2021.

Confidence returning

Confidence is starting to return in the Perth CBD despite the vacancy still being at 18.5%, as at January 2019 and is expected to rise further over 2019.

Vacancy has reduced in Perth CBD since peaking in December 2016. Net supply of -8,523m2 and net absorption of 62,641m2 drove this result. Looking forward, however, net supply is set to increase in 2019 with the completion of the refurbishment of 240 St George’s Terrace and a number of other small new builds and refurbishments. While most of this space will be committed prior to completion it is the back-fill space left by tenants such as Wood Group, HWL Ebsworth and Iluka Resources that will result in rising vacancy in 2019, back to above 20%.

In itself, this rise seems like a step backwards in an improving market, however, we believe this to be a further sign of returning confidence and an indication that landlords in Perth are preparing for the next upturn. The recent announcement by Brookfield that they have purchased Lot 7, Elizabeth Quay from Chevron, on a sale and leaseback basis, and will be commencing development of the site in mid-2020 is another key sign of an improving Perth office market.

The five-year outlook for Perth is for sporadic supply driven by pre-commitments and moderate tenant demand driven by public administration and mining.

Authors

Jennifer Williams

National Director - Research

View Profile > NSW

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The next rent move should be up

Due to vacancy remaining high, but offset by positive occupier demand and falling vacancy, prime face rents have now been stable since September 2017. It is forecast that the next rent move is upwards for prime stock in Perth, although that move could still be a year away given negotiation power remains in the hands of tenants with 140,295m2 of prime space still available at January 2019 and more by the end of 2019.

Conditions in the secondary market remain fraught. While it appears that this market may be stabilising with 15 months of unchanged rents, the vacancy is still high at 27.4%, compared to 13.0% for prime space. The advantage secondary stock has is the large gap between it and prime rents. However, with rents being a lower 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.

Sales activity strengthens

Sales activity in Perth CBD has been rising since 2015 and has been solid over the first four months of 2019. There are also a number of buildings on the market at current including 570 Wellington Street, 181 St Georges Terrace and 246 Adelaide Terrace.

Looking over the year to the March quarter 2019, sales reached $899.82 million, largely due to a strong fourth quarter of 2018 and start to 2019. Over the year, unlisted funds were the most active purchaser group, accounting for 47.3% of sales.

Investment demand is expected to continue in Perth CBD over the short-term as confidence returns generally to the state. This is largely due to the strengthening performance of mining and continued spending on infrastructure.

 

Yields still attractive

Investment yields have tightened over the year to March 2019 by 13 basis points, unlike most CBDs further tightening is expected in 2019 on the back of improving demand and the average yield being higher than the other CBDs so still attractive to overseas and interstate investors.

For secondary stock, yields have been stable over the year to March 2019 and this is likely to continue over 2019 as the market is driven more by local private investors and syndicates.

Perth CBD slowly turning the corner

Vacancy is expected to rise over 2019, due to backspace and vacancy from the completion of the refurbishment of 240 St Georges Terrace, rents are likely to remain low in the short-term. With demand continuing to be positive and supply dropping off from 2020 to 2022, the Perth market is expected to have reached the nadir of the current property cycle and should see a return to growth over 2020.

The investment market in Perth is witnessing a slow but steady improvement with sales levels increasing since 2015 and having already started solidly in the first four months of 2019. Prime yields have been slowly falling since peaking in 2009 and are expected to see a further slight tightening in 2019. Secondary yields are expected to be stable over the next few years.