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CBD OFFICE
Accelerating success.
Colliers International
A leader in global real estate services, defined by our spirit of enterprise. Through a culture of service excellence and collaboration, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners. We represent property investors, developers and occupiers in local and global markets. Our expertise spans all property sectors office, industrial, retail, residential, rural & agribusiness, healthcare & retirement living, hotels & leisure. Colliers International is Australias own global real estate success story.
$2 billion
in annual revenue
2.5billion 13,500
Contents
Whats in the pipeline for tenant demand? Our CBD Office perspective CBD Office market snapshots 1. Sydney 2. Melbourne 3. Brisbane 4. Perth 5. Adelaide 6. Canberra 7. Auckland Our CBD Office experience 12 16 20 24 28 32 36 40 5 10
Grosvenor Place, 225 George Street, Sydney Leased and valued by Colliers International
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Jun-10 Jan-10 Jan-13 Jan-07 Jun-07 Jan-08 Jun-08 Jun-04 Jan-06 Jun-06 Jan-05 Jan-09 Jun-05 Jun-09 Jun-12 Jun-13 Jan-11 Jun-11 Jan-12
12 months with the expectation that landlords have bitten the bullet early and increased incentives based on vacancy forecasts, rather than the point in time vacancy. Effective rents began their decline long before vacancy rates made any major move upwards. So while it is expected that incentives will climb over the second half of 2013, it wont be done at the same aggressive rate as the first half of the year. NATIONAL CBD A GRADE OFFICE NET EFFECTIVE RENT INDEX
5.00 4.50
Index Value (Base = March 2000)
a sharp rise in incentives over the first half of 2013, as competition to fill vacant space increased. Incentives rose by as much as five percentage points (pp) over the first half of 2013. Adelaide (5pp) and Perth CBDs (3.7pp) saw the highest growth and now sit at an average of 20% and 15% respectively. The impact of stable face rents and rising incentives has been a softening of effective rents which fell by 5.1%, on average, over the first half of 2013. The forecast is a little brighter over the next
4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2000
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Sydney
Melbourne
Brisbane
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567 Collins Street, Melbourne Colliers International valued and appointed to lease
history never repeats, we need to keep this cycle in mind when looking at broader economic factors which will drive growth over the short, medium and long term. The completion of the election, lower interest rates and softer Australian dollar are all expected to be key drivers behind the retrun of confidence and growth across the economy. Put simply, here is how the recovery could play out:
RECOVERY TIMELINE
Sept 2013 Federal election gets decided
END 2013
Company revenue/ profit increases Private (business & household) investment increases Businesses look to hire more staff to accommodate growth Businesses look to expand office accommodation to fit new staff The office market recovery begins
The problem will be getting these indicators to line up, as expected, to stimulate the economy. Recent signs of growth in both the US and UK economies, the cash rate falling to 2.50% and the dollar depreciating to below USD 0.90, all provide positive signs for future growth.
2013
90,000 80,000 70,000
Office NLA (Sqm)
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Vacant Space
Note: Includes developments currently under construction with office NLA above 10,00sqm Source: Colliers International
Committed Space
IRRs and bond rates, the only concern for investment markets
The flow of capital into CBD office markets is expected to remain strong in the face of ongoing low interest, borrowing and deposit rates. Two issues, however, need to be kept in mind. Firstly, current leasing conditions have seen future income growth rates downgraded, leading to a softening of Prime Grade IRRs, to below 8.50% in some cases. Secondly, US bond rates have risen steadily over recent months. This may in turn see office yields across the major US office markets move upwards. While this is not expected to have a major impact, it may affect the inflow of offshore capital, as yields begin to look more attractive in the US and other offshore markets. Although this may be seen as positive, by domestic players, currently competing with offshore groups to acquire assets. Share this story
Office Yield
Bond Rate
Spread
Sep 2013
Recovery timeline
Australian Federal Election. Prime Minister elected
This will lead to improved business confidence
Dec 2013
2%
What effect has soft tenant demand had on rents and incentives?
Incentives have risen Effective rents have declined
3.2% 7.3%
0.9% 1.1%
Sydney
0.2%
-3.4% 1.4%
Adelaide
-1.7% -0.9%
3.3%
Canberra
-4.1%
Melbourne
0.3%
0-999m2
1,000-2,999m2 >3,000m2
H1, 2014 Company revenue/ profit increases Private (business & household) investment increases Businesses look to hire more staff to accommodate growth
H2, 2014
t Tenan d n a dem
he p in t ng u k c i i P leas office et r a m k
Melbourne - CBD 10
A Grade Gross Face Rents A Grade Net Effective Rents A Grade Incentives A Grade Yields A Grade Capital Values A Grade Vacancy Rate Total Market Vacancy Rate Supply Additions (m)*
*Total market additions over 12 month period Source: PCA / Colliers International
12
Leasing market
Cost drives lease activity
Cheaper space within both Prime and Secondary Grade assets has attracted the majority of enquiry and interest, over the first half of 2013. Scrutiny of accommodation budgets, by cost conscious tenants, has been a major driver behind this trend. An analysis of transactions, signed in the first half of 2013, shows that 52% of leases were in Secondary Grade buildings while 74% were for 700m or less. A positive driver for activity within the CBD has been the ongoing low vacancy rates in Sydneys metropolitan office markets. Combined with strong rental growth this has seen tenants from these markets, particularly North Sydney, look for comparable accommodation within the CBD.
order to maintain the future cash flow and capital value outlook for their assets. In some cases face rents have actually increased in line with inflation, rent reviews and outgoings. The top end of the market has experienced the largest softening of rents with the large, expensive, higher floor tenancies receiving the lowest levels of enquiry. Smaller, lower level suites within the same towers have continued to attract interest. Stable face rents and rising incentives led to a softening of effective rents, by an average of 2.7%, during the first six months of 2013. Incentives now range from 25%, for fitted out space within well leased assets, to more than 30% in buildings with higher levels of vacancy. The Premium Grade market took the biggest hit, in terms of softening effective rents, falling by an average of 6% over the first half of 2013. In line with higher levels of interest the B Grade market saw the smallest decline in effective rents, falling only 0.8% on average over the same period.
500sqm or less
501-1,000sqm
1,001sqm or greater
161 Castlereagh Street, Sydney Valued on behalf of The GPT Group and ISPT
13
Investment market
Investment demand remains strong
The influx of capital chasing CBD office assets continues with demand for core investment assets outstripping supply. The first half of 2013 saw $605 million (excluding portfolio sales) worth of investment transactions take place within the Sydney CBD office market, a 6% rise on the same period in 2012. A buoyant second half of the year is also expected with the $317 million, 50%, sale of 200 George Street by AMP, taking place in the first two weeks of July. Domestic institutional buyers have ramped up acquisitions, making up 67% of transactions in the first half of 2013. Offshore capital also remains strong making up 24% of sales, up from 19% in the first half of 2012. This is expected to rise over the second half of the year with Credit Suisse, reportedly, purchasing 400 Kent Street for $58 million in August.
Institutional Private
Foreign Other
14
January 2013 to 8.9% as of July 2013. A combination of factors drove this large growth. New supply additions totaled 90,843m for the six month period. Including, 161 Castlereagh Street (ANZ Tower), refurbished space at 1 OConnell Street and 363 George Street. A near doubling of sublease space from 13,603m in January 2013 to 32,142m in July 2013 also contributed to the growth in vacancy. The first half for 2013 also saw absorption turn negative for the first time since January 2010. The movement of tenants due to the completion of ANZ Tower was key to this absorption result. This saw Premium Grade absorption increase 36,393m thanks to the movement of Freehills and ANZ into the building from A and B Grade space. A Grade absorption was -27,846m for the first half of 2013, because the PCA counts the current Freehills space at MLC as vacant at the time ANZ Tower reached PC. B Grade absorption was -27,070m for the period chiefly due to the withdrawal of the 20 Martin Place.
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How else can we help you? Speak to one of our property experts today. au.office@colliers.com
For further information about our research please contact: Mathew Tiller Associate Director | Research | Tel +61 2 9257 0348 mathew.tiller@colliers.com
15
A Grade Net Face Rents A Grade Net Effective Rents A Grade Incentives Total Market Vacancy Rate A Grade Yields A Grade Capital Values (per m) New Supply Additions (m)*
*Total market additions over 12 month period Source: PCA / Colliers International
16
Leasing market
Tenant demand hurt by lack of business confidence
The Victorian economy, by most measures, has slowed since last year. However, Victorian Gross State Product (GSP) still grew by 2.3% over 2012/13, and is forecast to continue to grow over the five (5) year forecast period, albeit at modest rates in the short term. Victorian infrastructure, despite having its own share of issues, is seen as better than that in the remainder of the country, and both overseas and internal migration inflows to Victoria are still very strong. Nevertheless, business sentiment is flat, with results from the latest VECCI-Bank of Melbourne Survey of Business Trends and Prospects indicating that the expected performance of the Victorian economy over the year ahead remained weak and at a similar level to that reported in the previous survey. In terms of office demand the survey provided some more upbeat results, with the finance, property and business services sectors the only industries reporting positive business conditions over the June 2013 quarter. The good news is that white collar employment growth in the
Incentives doing their job, activity in the market has picked up as a result
Incentives for A Grade office space in Melbourne now average about 28%, and we expect this figure to creep up to 30% by the end of 2013. These incentive figures are averages, and it should be noted that the incentive offered by a landlord will be very dependent on their individual assets vacancy profile. The incentives currently being offered in the market, as well as the availability of good quality, contiguous floors, are encouraging tenants to review their space requirements and take advantage of some exceptional deals that are on offer. Colliers is aware of a number of major lease transactions that are currently under negotiation for these very reasons. While we are forecasting a further, minor, drop in effective rents for the remainder of the year, any letting up of some major vacancy in the market could see the average incentive figure move in the opposite direction, as landlords are under less pressure to let up remaining space. MELBOURNE CBD WHITE COLLAR EMPLOYMENT
350,000 300,000 250,000
Persons
Melbourne CBD has still been growing. It is forecast to continue to grow by an average of 2.00%, or about 5,800 workers per annum, according to forecasts provided by Deloitte Access Economics. This equates to around 80,000m of office demand each year. While some of this demand will be absorbed into existing underutilised space, some tenants will choose to take this opportunity to expand into suitable premises and take advantage of the relatively generous incentives that are on offer.
0.0% -1.0%
17
Investment market
Longer term, leasing market indicators still attractive to investors
While the Melbourne CBD office market has experienced a period of rental declines, the majority of the decrease in effective rents that we are forecasting has already occurred. Over a 10 year investment timeframe, there is certainly significant upside income opportunity that investors buying into the market can take advantage of. Further, once the current cycle of new developments under construction are delivered, the supply side outlook is also favourable. Typically, the recovery of secondary grade assets lags that of the prime grade market, and we expect the same pattern to occur in the Melbourne CBD. These assets typically form only a small proportion of the target asset mix of offshore capital and local wholesale funds, but are increasingly popular with private investors and syndicates. As the bottom of the leasing cycle for the secondary market approaches, towards the latter half of 2015, we expect more transactional activity in this sector.
Tokyo and Seoul, are still seen as very generous. On all measures, Melbourne will remain a low risk market, and for this reason we expect global capital inflows to remain high. This will result in further yield compression, and we expect another 25bp compression in the near term.
10%
Global investors looking to place capital in commercial property normally look for markets that present a low geo-political risk, and over the long term display balanced supply and demand metrics. In all respects, Melbourne meets these criteria. Market cap rates for A Grade Melbourne assets have compressed to a range of 6.40% to 7.25% over the first half of 2013 on the back of some major transactions, and compared to some of the other major low-risk Asian destinations, such as Hong Kong, Singapore,
5%
0%
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-15%
Ju l-0 Ja 3 n0 Ju 4 l-0 Ja 4 n0 Ju 5 l-0 Ja 5 n0 Ju 6 l-0 Ja 6 n0 Ju 7 l-0 Ja 7 n0 Ju 8 l-0 Ja 8 n0 Ju 9 l-0 9 Ja n10 Ju l-1 0 Ja n11 Ju l-1 1 Ja n12 Ju l-1 2 Ja n13 Ju l-1 3 Ja n14 Ju l-1 4 Ja n15 Ju l-1 5 Ja n16 Ju l-1 6 Ja n17 Ju l-1 7 Ja n18
Prime Grade
B Grade
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January 2013. As the vast majority of this new supply was precommitted, the relatively large jump in vacancy can be explained by the associated backfill space from a number of these tenant moves. Major Melbourne occupiers such as NAB, CBA, Mercer, BHP and Service Stream all commenced occupancy in their new offices, and left behind an estimated 80,000m of backfill space. Some of this space is already committed, such as Mercers 11,800m backfill at 11 Exhibition Street by BUPA, while other space is likely to be taken out of stock and refurbished, including 555 Collins St, which NAB is to fully vacate as part of their move to 700 Bourke Street. Given that there are no major new buildings being completed or very large backfill premises being vacated over the next 12 months or so with the exception of Cbus Propertys 720 Bourke St we expect the vacancy rate to decline over 2014, and are forecasting the vacancy rate to be back down to 8.6% by July 2014. There are also a number of major deals in the pipeline that
313 Spencer Street, Melbourne Sold on behalf of CBUS Property
will add to net absorption over the remainder of this year and into 2014, including 5,600m which is currently under offer at 171 Collins Street.
100,000
112,091
80,000
60,000
76,769 66,358
40,000
20,000
28,835
2015
2016
2017
2018
How else can we help you? Speak to one of our property experts today. au.office@colliers.com
For further information about our research please contact: Anneke Thompson Associate Director | Research | Tel +61 3 9940 7241 anneke.thompson@colliers.com
19
A-Grade Gross Face Rents A-Grade Net Effective Rents A-Grade Incentives Total Market Vacancy Rate A-Grade Grade Yields A-Grade Capital Values Vacant Supply Additions (m)*
*Total market additions over 12 month period Source: PCA / Colliers International
20
Leasing market
Leasing volume falls
Major withdrawals and subdued tenant demand culminated in 64,069m of negative net absorption recorded during H1 2013 across all grades. While the withdrawals were negated by the delivery of 18,600m of fully committed new supply, the State Government exit, backfill associated with previously completed new developments and the release of vacant sublease space placed upward pressure on vacancy, well above previous expectations. Regarded as the most active participant of the leasing market, the energy and resources sector accounted for a quarter of absorption in the two years to mid-2013. H1 2013 illustrated the softening within the sector, with a contribution of circa 2% to lease volumes. The transport, logistics and postal services sector combined for a 40% share of leasing volumes with Boeing taking 7,500m in 150 Charlotte Street and Aurizon signing on for 2,800m at 192 Ann Street. Notably, the quantum of lease transactions was approximately half the H2 2012 total.
20%
Government Other
21
Investment market
Counter cyclical investment
The Brisbane investment market has been in a counterintuitive strengthening phase, unsupported by leasing fundamentals but rather broader economic drivers. As economic forces place downward pressure on risk premiums, Investment portfolios have been reweighted in order to gain greater exposure to higher yielding assets such as equities and commercial property, particularly prime grade CBD assets. During H1 2013 there were seven transactions involving 14 assets with a total value of $1.61 billion. As illustrated opposite, the market has seen a resurgence in activity from institutional purchasers, namely A-REITs and domestic funds.
Investment pipeline
Brisbane CBDs investment market momentum is expected to continue through the second half of 2013, particularly if economic fundamentals remain supportive of yield stability. A number of prime and secondary grade assets are expected to transact in the next 12 months with institutional, foreign, and to a lesser extent, private domestic buyers all active participants. With the Australian Dollar approaching the US$0.90 mark, reduced currency hedging costs appear more supportive for ongoing and possibly increased investment from offshore purchasers. BRISBANE CBD INVESTMENT SALES BY BUYER TYPE
5% 5% 9% 11% 20% 2%
6% 2011 Foreign
400 George Street, Brisbane Valued on behalf of Grosvenor International and HSBC Trinkaus
22
Supply gap
The delivery of the Australian Taxation Offices new Brisbane headquarters at 55 Elizabeth Street signals the end of the latest development cycle, with 2014 expected to be the first year since 2007 when no major new projects will be completed. Although the developer of 180 Brisbane, a 57,000m prime tower has signalled its intention to complete the project by H2 2015, it could be that the market does not see any significant new supply until 2016. Following 180 Brisbane, Grocon and Dexus anticipate their premium tower at 480 Queen Street will reach completion in H1 2016. Cbus and the Queensland State Government have begun construction on a new 75,000m prime grade building in the CBD government precinct with an expected delivery date of H1 2017.
2014
2015
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55
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Committed
How else can we help you? Speak to one of our property experts today. au.office@colliers.com
For further information about our research please contact: Alex Beer Research Analyst | Research | Tel +61 7 3026 3305 alex.beer@colliers.com
en t
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A Grade Net Face Rents A Grade Net Effective Rents A Grade Incentives Total Market Vacancy Rate A Grade Yields A Grade Capital Values Total Supply Additions (m)*
*Total market additions over 12 month period Source: PCA / Colliers International
24
Leasing market
While CBD vacancy rates have risen over last 12 months from 4.6% to 6.9%, it is important to note that this rise came against the backdrop of critically low vacancy rates and the introduction of significant new supply through 2012. Rather than reflecting any substantive weakness in the Perth office market, the rise in vacancy is more likely a rebalancing of an overheated market which Colliers International expects will continue to trend back to a longer-term average profile. Despite the increase in vacancy and rise in negative net absorption, Perth remains the best-performing capital city in
Colliers International expects CBD vacancy rates over the next six months to increase from the current 6.9% to a year-end estimate of low to mid 7%, with the likelihood of further increases to by mid-2015. Face rents for A and B Grade will come under pressure with the first response of landlords to offer greater incentives. Subsequently, the expectation is for some short term softening of face rents with potential for rising incentive levels. It is however, anticipated that in the medium term further resource sector investment and continued population growth will underpin improved office demand. PERTH CBD AVERAGE NET FACE RENTS
$1,000 $900 $800
Net Face Rent ($/m)
Forecast
terms of vacancy. The Perth CBD vacancy rate of 6.9% is notably lower than Sydney (8.9%), Melbourne (9.8%) or Brisbane (12.8%), and is a mark of the confidence, strength and resilience in the Perth market. The vacancy rate is at the lower end of market expectations prior to the release; however there is hidden sublease vacancy (although technically classed as occupied) which suggests that the actual availability of space may be higher than the official vacancy rate. Perths net absorption to July 2013 (-12,504m) was less than 20% of the Brisbane rate and less than half that of Sydney. The 12 month net absorption was -30,836m, but it should be remembered that the latter part of 2012 and 2013 to date have followed the highest CBD net absorption period on record. Sub-lease space, which spiked in the second half of 2012, has remained more or less stable at 2.5%, or more than a third of all vacant space. The stabilising of the level of sub-lease space may reflect a pause in the round of job shedding that occurred in the wake of the deferral of a number of capital-intensive resourcerelated projects in the second half of 2012. As already stated, there remains a substantial pipeline of committed and feasibility stage projects scheduled for WA over the near to medium term, and it is this investment pipeline that may reasonably underpin the States economic performance for some time yet. The current PCA figures also reflect a flight to quality, in that vacancy rates for Premium Grade buildings have in fact tightened appreciably to 2.7% (down from 4.5% in January) whereas A Grade vacancies have increased to 6.3%. The majority of the movement in vacancies has occurred in the secondary grades, and this has implications for the viability of this stock as new and refurbished supply comes on line from mid to late next year. Premium and A Grade net face rents are averaging approximately $835/m and $715/m respectively, with A Grade coming off about 3% from January this year. A Grade net face rents remain, by some margin, the most robust in the country.
CBD A Grade
CBD B Grade
25
Investment market
Strong transactional activity in 2013
The first half of 2013 has seen a record level of sales activity, with more than $1.2 billion in transactions taking place. This figure exceeds the previous record of $1.1 billion set in 2011 and, importantly, it has been achieved over just six months unlike 2011, where the figure was the result of a full year of transactional activity. Major transactions to the end of June 2013 include the Dexus purchase of King Square towers 1, 2 and 3 for $434.8 million. These buildings are now under construction and expected to be delivered mid-2015 and included strong pre-commitment levels. Other major transactions include Mirvacs $231 million purchase of Allendale Square, the $458 million sale of 300 Murray St to Charter Hall and the $97.8 million purchase of the fourth King Square building (KS4) by not-for-profit insurer HBF, where the company will relocate its Perth head office to. Capital values have remained largely stable in 2013, due to relatively low vacancy and sound rental returns despite uncertain global and national economic environments Premium Grade asset capital values are estimated to be between $9,700/m and $10,850/m. A Grade values are estimated to have come off slightly, ranging between $8,200/m and $8,675/m, while B Grade assets are estimated to be between $5,500/m and $6,375/m. Capital yields for Premium Grade assets in the first half of 2013 have contracted very slightly, to between 7.5% and 8.25%. There has been a similar tightening of A Grade yields to a range of 7.75% to 8.5%, whereas B Grade yields have increased slightly to a range of 8.25% to 9.25%. Buyer interest and the weight of capital chasing Perth CBD office assets remains strong and is expected to continue in the near term. The differential between prevailing yields and the current cost of capital is believed to be a substantial driver of institutional activity in the Perth market, and while rents are expected to moderate somewhat over the short to medium term, the investor interest. continuing availability of capital is expected to stimulate continued
66 St Georges Terrace, Perth Sold on behalf of AMP Capital Investors.
IMAGE
In the first half of 2013 more than 92% of the value of CBD and near CBD office investments has been by institutions. The relative value share of activity by institutions has jumped by more than 75% since 2011. The level of inquiry and interest from both Australian and overseas investors is solid and reflects an appreciation of the strength of the fundamentals of the Perth market by investors, with overseas investors in particular, demonstrating increasing interest in Perth.
26
100 St Georges Terrace, Perth Valued on behalf of ISPT as trustee of the Industry Superannuation Property Trust No 2
In addition to these, the proposed Kings Square 4 building, which has just been purchased by HBF, has an estimated delivery date of mid-2015. 999 Hay St (10,655m) is 61% pre-committed, and is expected to proceed to construction in the immediate future. Current refurbishment space under construction of 22,540m includes 565 Hay St and 32 St Georges Terrace.
2014
2015
40,000
U/C U/C U/C
30,000
U/C
0
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U/C
10,000
U/C
U/C
U/C
20,000
U/C
06
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Source: Colliers International
Committed New
Uncommitted Refurbishment
at
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Committed Refurbishment
How else can we help you? Speak to one of our property experts today. au.office@colliers.com
For further information about our research please contact: Michael Knight Manager | Research | Tel +61 8 9261 6675 michael.knight@colliers.com
98
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A Grade Gross Face Rents A Grade Net Effective Rents A Grade Incentives Total Market Vacancy Rate A Grade Yields A Grade Capital Values Total Supply Additions (m)
*Total market additions over 12 month period Source: PCA / Colliers International
28
Leasing market
Employment growth forecast
Recent unemployment numbers for South Australia show a significant softening in employment growth with an unemployment rate of 7.1%. After job losses hit the finance sector over the course of 2012, forecasts remained optimistic for a return to positive white collar employment growth in 2013. However, recent white collar employment data from Deloitte Access Economics shows growth forecasts been revised down. Little to no rise in white collar employment is now expected through the second half of 2013. Finance sector losses and public service job cuts are still expected which will soften office demands from these sectors. While marginal growth across nine other sectors forecast that any decline in overall white collar employment growth will be offset. The outlook remains positive with white collar employment growth expected to rise marginally in December and continue to improve through each quarter of 2014.
Premium
A Grade
Jun-05
B Grade
29
Jun-13
Jun-11
Investment market
$87 million sale
The most notable office asset sale so far this year is 45 Pirie Street, which sold recently for $87 million to CorVal, who were acting on behalf of Future Funds, Funds SA and VIC Funds Management Corp on a passing yield of 8.4%. The building was originally acquired by Commonwealth Property Office Fund (CPA) in 2002 and remains a prominent A-Grade office asset in the Adelaide market. The building has a Weighted Average Lease Expiry (WALE) of 4.7 years and more than 75% is leased by South Australia Government tenants. It is one of the few major assets in recent times that has been offered for sale via expression of interest campaign.
45 Pirie Street, Adelaide Sold on behalf of Commonwealth Property Office Fund (CPA)
30
New development
Peoples Choice Credit Union have moved out of their existing premises on the corner of Flinders Street and Gawler Place to a temporary adjacent location with site preparations underway for their new building. Known as 50 Flinders Street, the 21,000m development finally got the go ahead after Santos pre-committed to lease 5,300m. Santos will be relocating from 30 Flinders Street upon completion. Peoples Choice Credit Union has preleased 10,000m and will be consolidating their headquarters, including Light Square and Flinders Street, into the new building. It is expected the new building will be completed in Q3-2015. The office component of Bendigo and Adelaide Banks new building, Rundle Place, at 80 Grenfell Street is almost complete. It is expected it will be ready for occupation in November. The bank will be consolidating their business from multiple CBD locations, the most significant being 169 Pirie Street. 169 Pirie Street sold late last year for $22.1 million however it is expected
Net Lettable Area (m)
2 King William Street, Adelaide Managed on behalf of 2 King William Street Pty Ltd
backfill has now been returned to the market and is available to lease. However, recent shifts within existing supply have added a further 19,000m to vacant supply levels. In the short term, overall vacancy is expected to remain above 12%. Although the overall vacancy rate is forecast to rise marginally in the short term, the majority of available space will be in Secondary grade stock. ADELAIDE CBD DEVELOPMENT PIPELINE
40,000 2013 35,000 30,000 2013 2014 2015 Mooted
that the building will be withdrawn for at least six months for refurbishment.
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Refurb/Backfill Leased
10 2
42
Refurb/Backfill Vacant
How else can we help you? Speak to one of our property experts today. au.office@colliers.com
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A Grade Net Face Rents A Grade Net Effective Rents A Grade Incentives Total Market Vacancy Rate A Grade Yields A Grade Capital Values (per m) New Supply Additions (m)*
*Total market additions over 12 month period Source: PCA / Colliers International
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Leasing market
Tenant demand hurt by long lead in to federal election
While it is commonly assumed that the long lead in time to the Federal election has had a negative impact on tenant demand in Canberra, the local market is very experienced at dealing with changes in government, and can adapt accordingly. The lull in government activity and soft conditions in the leasing market has more to do with a greater than expected downturn in government revenue, than the federal government departments being in caretaker mode. On a positive note, the other major driver of white collar demand in Canberra, Business Services, is expanding as some federal government positions that are lost, are re-born as contractor positions and filled by those in the private sector. While employment is expected to continue to grow in this sector, over the two years to June 2015, it is not expected to grow by nearly enough to offset the contraction in employment in the government sector. This will result in negative white collar employment growth in the government and business services sector in the CBD and Barton, and this is the first time this has happened over the past 15 years.
rents and/or increase incentives. These deals, however, are not across the board and a closer analysis reveals that this sentiment should not apply to all markets. While the bureaucratic precinct of Barton/Forrest is experiencing an oversupply, placing pressure on rents and incentives, the CBD precinct is not experiencing the same issues. Overall, there is a disconnect between the demand for A Grade space and the supply of secondary grade space.
Incentives flat, but still modest compared to the rest of the country
The broader market dynamics continue to favour tenants, as the vacancy level remains elevated. Some landlords and developers with larger vacancy profiles which are most commonly secondary grade buildings - are under more pressure to secure positive cash flows, and have been more willing to decrease face
Government
Business Services
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Investment market
Very few transactions limited investmentgrade stock available
The have been only two investment sales transactions over $10 million in Canberra over the year to June 2013, with both these sales brokered by Colliers International. A private investor purchased 4 Mort Street in the CBD for $14.75 million in May of this year, which represented a yield of 11.72%. This is a fully occupied secondary grade building which was priced slightly out of reach for many local investors, while the lease profile was unsuitable for institutions, which meant a relatively thin market at the time of sale. More recently, Canberra House at 40 Marcus Clarke Street in the CBD sold to MPG Management Pty Ltd on an 8.38% yield which reflected a premium for surplus development rights. This is the largest transaction in the Canberra region since Growthpoints purchase of 10-12 Mort Street in June 2012.
underpinned by a safe AAA rated government tenant. Despite this appetite, there has been no foreign investment in Canberra over the year to date; however, this is the result of a lack of stock, rather than a lack of interest. When these types of properties do come on the market, there is generally strong competition amongst buyers. Colliers International is aware of two major assets currently being marketed (off market) to both national and international investors. Our understanding of the negotiation process for both assets indicates a firming of 25 to 50 basis points over the last 12 months, although this wont be confirmed until the sales are completed .
Foreign investors have acquired over $1 billion of Canberra property since 2006
Canberras prime assets continue to appeal to foreign investors who are attracted to quality assets with long term leases
2007
2010
2001
2002
2004
2006
2005
2008
2000
IRR
Yields
10 yr Bonds
Canberra House, 40 Marcus Clarke Street Canberra Sold on behalf of Primespace Property Investment Limited. Managed on behalf of Morris Property Group
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2009
2003
2012
2013
2011
A Grade and CBD vacancy is still very low. Higher vacancy in secondary grade space and bureaucratic precincts of Barton/Forrest
The CBD accounts for about 30% of the entire market and has grown from 460,000m in 2007 to over 650,000m today. The surge in growth from 2007 to 2011 caused the vacancy level to spike at 14% in 2010. However, strong demand from predominately government and business services firms, have gradually absorbed this space. Tenant preference for quality and the migration from old to new has caused a shift in the current vacancy profile with the combined B, C and D grades reaching 13.4% vacancy compared to only 3. 9% for A Grade. Overall vacancy for Canberra now sits at 12.0%, which is just over double the 10 year average rate of 5.6%. Looking forward, the vacancy rate is expected to remain at about these levels, while demand is subdued. Some precincts, however, are expected to fare better than others, with the CBD still expected to attract the majority of demand and continue to have minimal vacancy. Interestingly, sublease vacancy in the Canberra market is at its lowest level in years, with only 4,000m of sublease vacancy recorded in July 2013, compared with a high of 81,000m of sublease vacancy in July 2010. This indicates there is very
m
No firm projects in the supply cycle, beyond projects currently under construction
Given that, on average over the past 10 years, Canberra has added just over 100,000m of office stock to supply per annum, supply levels moving forward are looking particularly low. Whilst there are a number of projects mooted, the only project committed to construction is 1 Canberra Avenue, Forrest. This is a 24,500m speculative project, and is due for completion in late 2014. There is a further 160,000m of supply that potentially be constructed over the next three or so years, but it is expected that only around half of these buildings will actually get off the ground. CANBERRA SUBLEASE VACANCY
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Jan-04 Jul-04 Jan-05 Jan-06 Jul-06 Jul-05 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jan-10 Jul-10 Jul-13
little capacity for growth in occupied tenancies, which is further indication that demand could turn around quite quickly in 2014.
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For further information about our research please contact: Felice Spark Director | Research | Tel +61 2 9257 0373 felice.spark@colliers.com
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A Grade Gross Face Rents A Grade Net Effective Rents A Grade Incentives A Grade Yields A Grade Capital Values A Grade Vacancy Rate Total Market Vacancy Rate Supply Additions (m)*
*Total market additions over 12 month period Source: Colliers International
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Leasing market
Confidence drives leasing
Confidence in business and employment growth intentions is translating into increased demand for Auckland CBD office. Net absorption of 38,000m was recorded over the first half of 2013, which pushed the overall office vacancy rate in the CBD down to 9.9%. This is the highest half yearly net absorption result since December 2002. Telecoms HQ on Victoria St, with one of the four pods now available for lease, sits outside of our CBD survey.
Aucklands outperformance
Overall, the Auckland CBD office leasing market continues to outperform other main centres, a reflection of the positive fundamentals of growth in business and employment. AUCKLAND CBD OFFICE VACANCY BY GRADE
4% 5% 13% 55%
22%
D Grade
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Investment market
CBD office sales up
The pick-up in New Zealand CBD office sales by value in the second half of 2012 was the strongest since 2007 and the third highest recorded since our records began in 1998. This pushed the aggregate sales value of $2million plus properties to $654 million. Auckland CBD office sales contributed around $250 million. One of the most significant sales in 2013 includes Aucklands No.1 Queen Street, HSBC House for $103 million. Precinct Properties, New Zealands largest owner of CBD office buildings purchased the building from a long-term private investor. The latest acquisition now provides Precinct with almost two hectares of land positioned on Aucklands CBD waterfront. Private and unlisted local investors dominate New Zealand CBD office purchases over $5 million, typically accounting for almost two-thirds of all sales. Private investors accounted for more than half of all sales in 2012, with a similar pattern emerging in 2013. However, there is resurgence in listed sector office purchases, a reflection of the listed sectors average weighted premium to NTA.
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
ar
95 M
ar
96 M
ar
97 M
ar
98 M
ar
99 M
ar
00 M
ar
01 M
ar
1 02 r 03 r 04 r 05 r 06 r 07 r 08 r 10 r 1 r 12 r 13 r 14 r 15 a a a Ma Ma Ma Ma Ma Ma a Ma a M M M M M
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site has existing resource consent for a 71,000 sq m mixed-use office and retail development. In their latest annual presentation Precinct noted that office development may start as early as 2017, halfway through the development of the retail space. Aside from the Fonterra building and the Downtown Shopping Centre, the supply pipeline remains low by historical standards. For two and a half years the Auckland CBD office vacancy rate has been in decline and is forecast to remain historically low. While some businesses in prime office space may shift to city fringe or secondary accommodation, it is likely that many will want equivalent or better quality space within the CBD. Given the lead in for construction time, a new office building in the CBD may be committed to sooner rather than later to assist in alleviating the pressure at the top-end. AUCKLAND CBD OFFICE VACANCY BY PRECINCT
Supply increases
Auckland CBDs net lettable area has increased in 2013, a reflection of the recently completed ASB Building on Jellicoe Street in Wynyard Quarter, which we now include in our definition of the CBD. The 18,000m building accommodates around 1,400 staff members who have moved in over the last few months. The Wynyard Quarter currently comprises 41,000m of net lettable area comprising six buildings. It will increase in size further upon completion of the new Fonterra Head Quarters. Situated opposite Victoria Park on Fanshawe, Halsey and Gaunt Streets a 12-14 storey office building is earmarked for Fletcher Buildings site. Development is expected to start within the next six months. Fonterra will move from a number of premises, however, one of the largest is the Princes St headquarters where the lease expires in July 2016.
20%
16%
With Waterfront Auckland promoting development of various sites which could accommodate around another 50,000m of office accommodation, Wynyard Quarter has arrived on the stage as a viable office location.
4% 12%
8%
In the Core CBD, the announcement that the City Rail Loop (CRL) will be partially government funded coincides with the Precinct Properties plans to redevelop Downtown Shopping Centre. The
Core
Viaduct Precinct
Western Corridor
Midtown
Symonds Street
Anzac Avenue
Upper Queen
Britomart
Quay Park
Wynyard Quarter
Jun-12
Jun-13
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For further information about our research please contact: Chris Dibble Manager | Research | Tel +64 9 359 7919 chris.dibble@colliers.com
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Our experience
leased
5 Martin Place Sydney 13,850m2 On behalf of Colonial First State 699 Bourke Street Melbourne 15,000m2 On behalf of Mirvac Group
CBD OFFICE
863 Hay Street Perth 5,020m2 On behalf of Anglican Dioesesan
managed
17-19 Bridge Street Sydney 5,965m2 On behalf of Bridge Lane Holdings 399 Lonsdale Street Melbourne 10,176m2 On behalf of FKP Property Group 50 Cavill Avenue Brisbane 16,300m2 On behalf of Deloitte
sold
10 Barrack Street Sydney $62.5 million On behalf of Blackrock Investments Management 313 Spencer Street Melbourne $120 million (50% interest) On behalf of CBUS Property 66 St Georges Terrace Perth $82.37 million On behalf of AMP Capital Investors
valued
161 Castlereagh Street Sydney 60,000m2 On behalf of The GPT Group and ISPT 567 Collins Street Melbourne 54,271m2 On behalf of Investa Commercial Property Fund (ICPF and Investa Office Fund (IOF) 400 George Street Brisbane 43,500m2 On behalf of Grosvenor International and HSBC Trinkaus
project managed
71 Collins Street Melbourne 1,500m2 Design and project management Australian Bureau of Statistics 5,000m2 Project management Clifford Chance 1,200m2 Workplace design, project management and tenant representation
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370 offices worldwide throughout 62 countries 46 offices throughout Australia and New Zealand
Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. Colliers International 2013.
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