Commercial yields, values strong

Western Australia’s commercial office market notched up almost $1 billion in sales last year, and while some analysts predict the same heights may not be reached in 2008, market fundamentals indicate that strong growth is likely to continue.

According to research by property group Savills, the total value of office property worth $1 million or more sold last year was $960 million, down about 23 per cent from the $1.25 billion achieved in 2006.

The year’s biggest deal was the sale of the former Woodside building at 1 Adelaide Terrace, which fetched $87 million for owner ING Office Fund in July.

The eight-storey office building has a net lettable area of 19,187 square metres.

A few months later, ING Real Estate Development Australia made an inter-company transfer of the Wellington Central project to ING Office Fund, at a value of $81.5 million.

ING, in conjunction with its joint venture partner, Sydney-based developer Lewis Land Construction, is constructing an eight-level office building on the West Perth site, which is expected to be completed early next year.

The project will provide about 12,000sqm of floor space to its incoming tenant, the Department of Immigration and Citizenship, which signed a 10-year lease for the entire building in September.

CB Richard Ellis property research analyst Michael Olsen said he expected 2008 to be another buoyant year for the commercial sector, supported by high demand.

“Institutional investors in the eastern states are becoming more aware of WA’s market potential,” he said.

“It may not reach the same heights as last year, but we believe it will be a strong year in sales. It’s just a matter of whether or not companies hold on to or sell their assets, given the growth potential that’s out there.”

Mr Olsen said property yields were also expected to increase during the year.

“The market yield has softened due to growth in market rents,” he said.

“The average premium grade market yield will probably be six to 6.5 per cent this year, up from 5.75 to 6.25 per cent over the past quarter, due to stronger market rents.”

The last quarter of 2007 was a particularly strong period in office sales, with the stand-out transaction being Charter Hall’s acquisition of the 20-storey Westpac building at 109 St Georges Terrace for $65 million.

Also ranking in the top deals of the year was the $60 million sale of an A-grade building in the CBD, which is expected to close this month and will be counted as a December sale.

While the buyer has not been confirmed, WA Business News understands that one of the only buildings currently on the market of a scale to warrant that price is the Clough building at 251 St Georges Terrace.

The Clough building was purchased by commercial property investor Hossean Pourzand in 2005 for $30.8 million.

Savills divisional director of investment sales, Miles Rowe, said the December quarter had been strong because companies were keen to clear assets before Christmas.

He said that, while rents were expected to increase, sales were likely to plateau during the year.

“I don’t think we’ll see any significant ongoing growth in capital value,” Mr Rowe said.

“But I think we’ll see a significant increase in rents achieved in pre-leasing deals, as a function of increased costs. Developers are comfortable sitting back and not chasing tenants, because they’ve already leased 30 to 50 per cent of new stock,”

Mr Rowe said while some pre-committed stock was currently available for around $700/sqm, this rate could be expected to increase.

“The big issue is that building costs are going up. It wouldn’t surprise me to see rental rates of $800/sqm for new space. Tenants that have pre-committed should be feeling pretty good,” he said.

“The question is whether rents are going to be sustainable going forward. Big rents for older style buildings may not be sustainable, but for new stock, I think new benchmarks are going to be achieved.”

Other major sales for 2007 included Eastpoint Plaza at 233 Adelaide Terrace, which was bought by Macquarie Office Trust in July for $56.8 million.

The sale represented a $37.5 million increase in value for the 11-storey building.

Westmain Corporation Pty Ltd also delivered a tidy profit to Peak Property Holdings when it bought the May Holman Centre at 32 St Georges Terrace for $42.5 million in May.

Peak had paid $26 million for the property in early 2006.

Also on St Georges Terrace, Standard Life Investments purchased the Colonial Building for $47 million in May.

In addition to Wellington Central, West Perth’s major sale of the year was 1-5 Havelock Street, which was bought by Stockland in March for $28.8 million.

Other major transactions included 8 Kings Park Road, which WA Business News understands sold for about $20 million.