Perth’s commercial office market has been a landlords’ dream during the past 12 months, prompting significant sales activity in the CBD and a few headaches for tenants.
Perth’s commercial office market has been a landlords’ dream during the past 12 months, prompting significant sales activity in the CBD and a few headaches for tenants.
With the CBD office vacancy rate at a 25-year low of 0.7 per cent, attention is focused on the progress of five new office buildings under construction, which will deliver 245,500 square metres of new office space and some welcome relief over the next three to four years.
In the meantime, institutional investors and local syndicates are burning a trail down St Georges Terrace, seeking office properties with the potential for significant rental reversion.
GE Real Estate is among those to have bought in recent months, with its off-market purchases including Allendale Square and Allendale 2 for about $230 million.
Just last month, GE bought the eight-storey RSM Bird Cameron building at 8 St Georges Terrace for $27.3 million.
Macquarie Bank, has also increased its presence in the CBD, acquiring the 12-level Eastpoint Plaza on Adelaide Terrace last month for $56.8 million.
Macquarie also acquired 81 St Georges Terrace from GE Real Estate in June for $42.5 million.
Signing the second biggest deal in the past 12 months, behind the Allendale transaction, was Stockland Ltd, which secured a 50 per cent stake in the BankWest tower for $139 million in January, as well as 100 per cent of 45 St Georges Terrace for $57.3 million.
Proving just how far the market has come, the former Woodside headquarters at 1 Adelaide Terrace was sold to ING Real Estate for $87 million last month on a passing yield of less than 5 per cent, having been valued at just $47 million about two years ago.
Bought for $26 million in early 2006 by Peak Property Holdings, the May Holman Centre at 32 St Georges Terrace also attracted a hefty off-market sum this year of $42.5 million, prompting Peak to shelve its major refurbishment plans and take the cash.
CB Richard Ellis managing director WA, Peter Agostino, expected the demand for commercial office investment in Perth to continue over the short to medium term, particularly for high-end properties.
“Perth has had enormous interest from German funds and investors, who are making significant acquisitions…the wholesale funds have enormous depth and are the most aggressive buyers,” he told WA Business News.
“This office boom is similar, in terms of activity, to that which occurred in the late 1980s which was more predicated by private investors taking their money out of the share market and putting it into property.
“Now it’s the superannuation money, which has an almost unsociable thirst for investment.”
Mr Agostino said it was difficult to predict a further tightening of yields across the board, given that each commercial property was different according to face yield and potential for rental growth reversion.
And it is this potential for lucrative rental reversion on properties, considered under-rented in the current market, which is principally driving the buoyant sales activity, according to market watchers.
Savills managing director Paul Craig said prime office stock, comprising premium and A-grade office space, would achieve rents approaching $700 per square metre by mid to late 2008.
He said the traditional disparity between the rent charged in new developments and existing buildings was closing, as new developments started to charge higher rents.
“There’s no doubt that there will be rental growth. We’re seeing a fair percentage of pre-commitments but tenants really are running out of options,” Mr Craig told WA Business News.
Cheaper rents, quicker construction timetables and relatively generous car parking ratios were encouraging several CBD-based tenants to take up space on the city fringe, Mr Craig said, a trend that had gathered momentum this year.
Jones Lang La Salle joint managing director Steve Carulli said the statistics painted a worrying picture of tenants who were seriously constrained by the lack of space in the CBD.
About 8,873sq m of office space remains in the CBD and less than 1,502sq m in West Perth, according to recent research by the Property Council of Australia WA.
Mr Carulli was certain there would be several prime leasing deals achieving above $700/sq m this year, and expected an $800/sq m deal in the new year.
“There is no suggestion that this strong market will come to end anytime soon. We’re not looking at any prospect of oversupply,” he said.
“Tenants that should be in 1,400sq m offices are in 1,000sq m, and it’s hurting them. So a lot of the space that becomes available in existing offices will be backfilled quickly, tenants will jump on it.”
As a result of this rationalisation of space, Mr Carulli doesn’t think the CBD office vacancy rate will drift above 3.5 per cent before 2011.
However, a number of market analysts believe the vacancy rate may go considerably higher in the period, to as much as 10 per cent.
Colliers International associate director of research, David Cresp, said that, during 2009-10, the CBD office market would revert to a vacancy rate of between 8 per cent and 10 per cent, and remain at around 10 per cent until 2012.
“We’re looking at a much more stable and sustainable market,” he said.
“A lot of secondary quality space will come onto the market when tenants move out and into new developments. In the second half of 2009, about 30 per cent of anticipated supply will come onto the market, which is not a bad situation to have.”
Suburban areas would also fare well from the office boom, with about 150,000sq m of new office space estimated to be added to supply over the next three to four years, he said.
In such a tight market, property owners are also driving greater value from refurbishments, with about 32,577sq m of refurbished stock scheduled to re-enter the market over the next 18 months, according to the Property Council of WA.
In West Perth, about 9,979sq m of new stock will come online in the second half of 2007, with an additional 4,950sq m to be completed in 2008.
Mr Agostino said Perth’s current vacancy level of below 1 per cent was highly unusual, and forecast a return to a 5 per cent vacancy rate in 2009.
“With next to no vacancy, tenants will literally lease anywhere they can get,” he said.
In the CBD, a majority of the new office space earmarked for Perth has been pre-committed by major tenants over the past 12 months.
BHP Billiton is the most recent deal to emerge, signing on to 40,000sq m of space out of 65,000sq m in Multiplex’s proposed City Square development in July, on the long-vacant Westralia site.
Other major CBD pre-commitments include BankWest’s signing on for 42,500sq m of space at Luke Saraceni and Hossean Pourzand’s Raine Square tower, which is under construction by Melbourne-based Salta Properties.
Down at 239 St Georges Terrace, Bishops See development partners Hawaiian and Multiplex have started work on their nine-level southern office tower after signing KPMG to the project and, most recently, Macquarie Bank.
KPMG has agreed to lease 7,000sq m while Macquarie has taken 4,188sq m out of the 18,000sq m tower.
Hawaiian will build the second stage of the development comprising a larger 27-storey building of 46,000sq m of floor space once a significant pre-commitment has been secured.
The state government has also been active leasing space, pre-committing last year to 22,000sq m of space at Cbus Property’s 140 William Street tower, above the William Street train station.
Recently appointed joint venture builder, Diploma Probuild, is expected to complete the landmark development – which will eventually house more than 2,500 workers– by 2010.
Pivot Group and ISPT’s Century City development, meanwhile, is understood to be finalising a lease with NAB, where it would join Japanese oil and gas company INPEX in the 28,000sq m office building.
Other office projects set to begin construction shortly include Mirvac’s $100 million office and retail development at Wesley Arcade for the Uniting Church, and Cape Bouvard’s $60 million, 20,500sq m office tower at 54 Mounts Bay Road.
Savills’ Paul Craig said Perth would have a very different skyline in 2011, but meeting the demand for office space and enabling business to grow was most important for the economy.
