Perth CBD Office Market

August, 2018

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Perth CBD office market has reached the nadir of the cycle and is starting to show signs of improvement

Fundamentals in Perth Improving

Perth CBD is expected to have reached the nadir of the current cycle and is starting to show signs of improvement.

There was no new supply added to the market over the first half of 2018, however, Capital Square, which is Woodside Petroleum’s new headquarters is due to be completed in the second half of the year.

Other than refurbishments, such as 240 St George’s Terrace, which will be refurbished on the vacation of Woodside, the CBD supply pipeline is dependent on pre-commitments. This means many projects have reached DA approval stage and stopped, with some expiring prior to the project commencing.

Tenant demand has improved in the Perth CBD on the back of growth in employment in the white collar sectors. According to the Property Council of Australia, net absorption reached 30,759 square metres and is forecast to remain positive over the five-year outlook as the economy continues to strengthen.

This is set to result in vacancy continuing to fall over the five-year outlook.  Vacancy has already fallen to 19.4% as at July 2018 from a peak of 22.5% in January 2017. This was due to low supply and strengthening demand over the 18 months. Currently secondary vacancy, at 28.9%, is more than double prime (13.2%).


Gary Longden


View Profile > VIC

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The Next Rent Move is Likely to be Up

Due to vacancy remaining high, but offset by the strengthening of occupier demand, prime face rents have now been stable for the past nine months. 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 vacancy still at 19.4%.

Conditions in the secondary market of Perth CBD remain fraught. While it appears that this market may have also stabilised with two consecutive quarters of unchanged rents this is more difficult to ascertain.  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 this as an opportunity to move into discounted prime space.

Incentives have also been recorded as stable over the past six months and while they also may have peaked, their decline is expected to be gradual until the available space reduces.

Sales Activity Remains Low

Sales activity in the Perth CBD over the first seven months of 2018 has totaled just $212 million. There are a number of buildings on the market including 50% of Exchange Tower, 8 St Georges Terrace and 246 Adelaide Terrace, but matching expectations of owners and potential buyers is taking time.

Looking over the year to the June quarter 2018, sales reached $1.02 billion, largely due to a strong third quarter of 2017.  Over this period, foreign investors (particularly from Singapore and China) were the most active purchaser group, accounting for 36.5% of sales.

The largest sale of 2018 to date has been Workzone West at 202 Pier Street which transacted for $125.25 million.  The property was acquired by Elanor  Investors Group from Charter Hall Direct Workzone Trust.

Yields Stabilising

Despite investment yields having tightened over the year to June 2018, they have recently shown signs of stabilisation.

For secondary stock this is likely to continue over the short-term outlook while prime stock may see a further slight tightening on the back of improved fundamentals being offset by rising bond yields.

Five Year Outlook Positive

  • With vacancy starting to fall due to strengthening demand and low supply, the Perth market is expected to have reached the bottom of the current property cycle and should see a slow return to growth over the next few years.
  • Vacancy is forecast to decrease for the next five years, however, it has the potential to change depending on timing of new projects gaining commitments and where the committing tenants are currently located. Chevron’s commitment to new headquarters at Elizabeth Quay, including more than 52,000 square metres of office space, is likely to see vacancy increase again in 2023, due partly to backfill space in QV1.
  • We expect growth in effective rents to occur over the next five years due to both increasing face rents and declining incentives. The compound annual net face growth rate is expected to be 3.3% over this period.
  • Prime yields are expected to see a further slight tightening, whereas secondary yields are expected to be stable over the next few years.