PERTH CBD RESEARCH OFFICE MARKET OVERVIEW SEPTEMBER 2017 HIGHLIGHTS

Transcription

1 RESEARCH PERTH CBD OFFICE MARKET OVERVIEW SEPTEMBER HIGHLIGHTS The first decline in the Perth CBD Office Vacancy Rate since anary has provided an indication that the market has reached the bottom of the cycle. Whilst the vacancy rate is forecast to remain at similar levels into 8, the Prime market is expected to experience some effective rental growth de to easing incentives. A recent spike in transactional activity from local, national and offshore prchasers indicates conter-cyclical prchasing has commenced.

2 KEY FINDINGS The Perth CBD vacancy rate decreased to.% as at ly, the first fall recorded since anary at the peak of the resorce sector boom. Prime bildings remain better performed than Secondary, best represented by a Premim vacancy rate of only.%, along with stabilised face rents and incentives. Falling face rents and rising incentives has contribted to an increasing nmber of Secondary bildings being leased on effective terms. Conter-cyclical prchasing has commenced with three confirmed transactions to date from local, national and international prchasers, with frther activity anticipated. Recent transactions sggest a tightening of yields in the Perth market, narrowing the gap with east coast capital cites. MARKET OVERVIEW The Perth CBD has experienced a decline in office vacancy for the first monthly period since the peak of the resorce sector boom in anary, primarily de to a redction in sblease availability. In statistics pblished by the Property Concil of Astralia, the vacancy rate of.% eqates to a. percentage point decrease on the previos anary figres, reflecting total vacant stock of,99m² and apportioned as 8,9m² to Prime, and 9,m² to Secondary grade bildings. For the second sccessive biannal period, sblease availability has declined; having now redced from,m² reported in ly to 8,m² today. This fall is attribtable to a combination of factors, inclding companies (namely within the resorce sector) withdrawing space, as well as head leases expiring and converting to direct vacancy, or approaching expiry and no longer viable for sbleasing. A moderate increase in direct vacancy of,9m² indicates a degree of these factors at play, however on the whole the reslt is considered to represent matrity in the market and a small step towards a retrn to eqilibrim within Premim and pper A-grades. New additions to the market of,m² (netting to,88m² after stock withdrawals) are at their lowest level since anary ; a period which has yielded 9,m² of additional floor space across all grades within the CBD. Confirmed new spply within the market is limited to the 8,8m² Premim-grade Capital Sqare development, anticipated to be ready for occpation mid 8 and % pre-committed to Woodside. As a conseqence, the Dexs-owned,m² A-grade Woodside Plaza, located at St Georges Terrace, will fall largely vacant. A significant refrbishment of floors and bilding amenities will occr and is expected to be available for occpation Q 9. FIGURE Direct and Sblease Vacancy m per six month period NICHOLAS LOCKE Valer WA Follow The gap in performance between Prime and Secondary grade assets remains considerable, with tenants contining to seize the opportnity to relocate into better qality space. Prime net absorption is recorded at,98m², compared to Secondary at m². Over a two year period, this trend is even more prononced with total net absorption of 8,8m² and,9m², and crrent vacancy rates of.9% and.8% attribtable to Prime and Secondary stock respectively. l- an- l- an- l- an- l- an- l- SUBLEASE DIRECT Sorce: Knight Frank Research/ PCA an- l- TABLE Perth CBD Office Market Indicators as at ly Grade Total Stock (m²) Vacancy Rate (%) Annal Net Absorption (m²) Annal Net Additions (m²) Average Net Face Rent ($/m²) Average Incentive (%) Average Core Market Yield (%) Prime,8,88.9, - net.. Secondary 8,9.8-8, net. 8. Total,8,9., 8 Sorce: Knight Frank Research/PCA

3 PERTH CBD OFFICE SEPTEMBER RESEARCH MAOR OFFICE SUPPLY Capital Sqare, 98- Monts Bay Rd - 8,8m² [Woodside] AAIG - mid 8 - % committed to Woodside Woodside Plaza, St Georges Tce -,m² Dexs - Refrbishment Est. Q 9 Westpac, 9 St Georges Tce -,89m² Far East Organization - Significant Vacancy Q 8 Hay St -,m² - Seeking Commitment FES Ministerial Body - DA Approved 8 Crn Barrack St & The Esplanade -,m² [Chevron] Chevron - DA Pending QV & QV, Hay St -,9m² & 9,m² Investa/Commonweath Sper/City of Perth - DA Approved Perth+, Lots & Elizabeth Qay -,m² Brookfield - Application for DA with MRA & in-principle spport from City 8 9 St Georges Tce (Bishops See Stage ) -,m²+ Brookfield/Hawaiian - Mooted 9 Beafort St & srronds (World Trade Centre proposal) -,m² Nest Investment Holdings - Mooted 9 Map Sorce: Knight Frank Office Leasing Under Constrction / Completed Significant Vacancy / Refrbishment Dev Approved / Confirmed / Site Works Mooted / Early Feasibility Major tenant precommitment in [brackets] alongside NLA Map Sorce: Knight Frank Office Leasing

4 TENANT DEMAND & RENTS The Perth CBD office market contines to be defined by considerably stronger levels of demand from occpiers for Premim and pper A-grade bildings in comparison to B-grade bildings and below. This is best reflected by the Premim vacancy rate of.%, A- grade vacancy rate of 9.%, and B- grade vacancy rate of.8%, otlined below. We expect this trend to contine in the short to medim term. TABLE Perth CBD Vacancy Rates Grade an l Premim.%.% A Grade.% 9.% Prime 9.%.9% B Grade.%.8% C Grade.%.% D Grade^.%.% Secondary.8%.8% Totals.%.% ^ D Grade total stock only,m² Sorce: Knight Frank Research/ PCA Net absorption recorded,m² for the first six months, representing the second positive recording within a two year period, following the,m² reslt in anary. Althogh negative net absorption was recorded in ly and anary, the cmlative reslt over a two year period now eqates to positive,m². Whilst modest, this is a stark contrast to the cmlative negative net absorption of,m² recorded from anary to ly inclsive. Tenant Demand As existing leases expire within Secondary bildings, tenants seeking to pgrade will contine to be a major sorce of demand for Prime bildings. The crrent vacancy rate for Premim stock at.% is approaching a healthy level allowing for a potential easing of incentives into the ftre, which in-trn may price some prospective tenants ot of that market. This is beginning to transpire with demand trickling down to lower A-grade properties. For tenants locked in to existing leases, nmeros examples exist of early vacation with incentives on the new lease strctred to enable them to cover their otstanding obligations, whilst benefiting from the occpation of higher grade or refrbished premises. The prevalence of tenants seeking to enter into these deals is indicative of the sentiment that opportnities provided in the crrent market may not exist pon expiry. An increasing sorce of frther strctral shift in vacancy from Prime to Secondary grade properties has arisen from mergers and acqisitions occrring as a symptom of Perth s broader economic weakness. Larger companies seeking to consolidate their operations as a reslt of acqiring smaller distressed entities are typically in the market for Prime space, with the space vacated more likely to be Secondary or non-core. Other major sorces of demand have come from tenants in fringe CBD office precincts sch as West Perth, and frther beyond inclding Sbiaco and Osborne Park. Owners of higher capital vale Prime-grade assets within the CBD typically have a greater capacity to fnd pfront incentives throgh capital contribtions to position their properties as more attractive, as well as redcing the effective rent for the occpier to a level competitive with sbrban precincts. Owners within these fringe precincts are less able to fnd the same pfront benefits, and therefore cannot offer the same level of staff amenities (pls other locational benefits of a core CBDlocated bilding). These sbrban precincts are expected to strggle ntil eqilibrim is met in the A-grade market and competition for tenants is predominantly with B-grade assets. FIGURE Net Absorption and Vacancy ( m and %) per six month period FIGURE Net Absorption by Grade Premim, A, B, C & D Grade stock ( m ) FIGURE Perth CBD Historical Vacancy Prime and Secondary grade ( m ) % % %,,,, 8, 8 % % %,,, -, -, - l- l-8 n-9 l- l- l- l- NET ABSORPTION MONTHS TO (LHS) l- l- l- l- TOTAL VACANCY (RHS) -% -, l- an- l- an- l- an- l- an- l- an- PREMIUM A B C D l- l- 8 9 l- - n l- l- PRIME VACANCY l- l- l- l- l- SECONDARY VACANCY l- Sorce: Knight Frank Research/ PCA Sorce: Knight Frank Research/ PCA Sorce: Knight Frank Research/ PCA

5 PERTH CBD OFFICE SEPTEMBER RESEARCH Rental Levels The precipitos fall in face rents for Prime grade bildings has stopped, having stabilised at an average of $/m² for a period now approaching months, with higher rates still obtainable within the pper levels of Premim grade properties. Incentives also appear to have stabilised, sitting broadly in the range of % to % (net) for the majority of deals strck. With the FIGURE Perth CBD Prime Office Rents Average Net Rents and Incentives Rents ($/m ) 9 8 Premim vacancy rate now at only.%, owners have less motivation to provide incentives above %. Accordingly, for the first time since mid- there is potential for growth in effective rents for Premim-grade properties, and as a conseqence greater competition can be anticipated as tenant demand shifts to A-grade space. The rental market for Secondary grade stock paints a different pictre entirely, with net face rents contining to fall to approximately $/m² as a reslt of a redced demand. At this level, incentives (often seen at over %) are still not considered sfficient to fnd fitot costs to better position the premises to compete. With their assets also prodcing less cash flow, many owners have become less willing to fnd these pfront contribtions, reslting in fitots being recycled and more deals negotiated at effective rents. The creep of these effective rents is moving pwards towards B-grade stock. The impact of this can be negative for the vales of these assets which may lead to distressed sales and stock withdrawals. The City of Perth have released six concept designs for the conversion of sch bildings in an attempt to bring more edcation, stdent accommodation, mltiresidential, mixed-se and health and well-being ses to the CBD. FIGURE Perth CBD Office Rents Prime and Secondary Average Net Effective Rents ($/m ), 9 8 l- l-8 l-9 l- l- l- l- NET EFFECTIVE Sorce: Knight Frank Research l- l- l- INCENTIVES l- Whilst on an effective basis these rents may appear competitive in comparison to sbrban locations, the lack of pfront capital contribtions may inhibit the ability to attract potential tenants as relocation and establishment becomes cost prohibitive. l- an- l- an- l- an- l- PRIME Sorce: Knight Frank Research an- l- SECONDARY an- l- TABLE Recent Leasing Activity Perth CBD Address NLA Tenant Lease Type Sector Date St Georges Terrace 8 ASIC New Government Agst 8 St Georges Terrace 9 Cooper Energy New Oil & Gas ne, Allen & Overy New Law ne The Esplanade 98 Kansai Renew Utilities ne 8 AGS Renew Government March 8 Mont Street 9 Worley Parsons New Engineering ne St Georges Terrace 8 Forth Floor Chambers New Law May St Georges Terrace 8 Silk Hospitality New Service May Hay Street Medtronic New Medical May 8 Monts Bay Road,9 Kfpec Astralia New Oil & Gas May - William Street, Resolte Mining New Mining Febrary Sorce: Knight Frank Research

6 INVESTMENT ACTIVITY & YIELDS Transaction Activity Following a sbded end to and start to, transactional activity within the Perth CBD has rapidly picked p with for confirmed sales to a vale of approximately $ million, indicating conter-cyclical prchasing has commenced and the appetite for assets with the right leasing profile is strong. Stirling Street, commonly known as the Hatch Bilding, is a for level A- grade bilding, sitated to the north of the core office precinct and in proximity to the City s cltral district of Northbridge. The property sold flly leased with a WALE of. years to the listed Centria Metropolitan REIT, representing the Sydney-based fnd manager s first direct Perth acqisition. FIGURE Perth CBD Sales Activity ($ million) Sales Vale and Nmber (to Agst) $, $, $, $8 $ $ $ $- 8 9 VALUE OF SALES (LHS) Sorce: Knight Frank Research TABLE Recent Sales Activity Perth CBD NO OF SALES (RHS) 8 The property was acqired for $8. million on a 9% initial passing yield, with % of the bilding s NLA expiring in December and Agst, dissading many local prchasers. 9 St Georges Terrace is a -storey B -grade office tower, well-located at the prominent intersection of William Street and St Georges Terrace. The property was prchased by Far East Organization for $. million showing a % initial passing yield, however pon lease expiry to vacating tenant Westpac, the property will be % vacant. Despite the bilding s older improvements and the imminent expiry, the property was well received by local, interstate, and offshore prchasers alike de to the limited opportnity to acqire landmark sites. The intent of the prchaser is nderstood to be letting p the property in the short term. The Qadrant at William Street is a level A-grade office bilding, located at the corner of William Street and The Esplanade adjacent to Elizabeth Qay. A reported off-market transaction has occrred, with Primewest (backed by Singaporean sovereign wealth fnd, GIC) being the prchaser. Fll details of this transaction cannot yet be disclosed, however the property had a WALE of. years and vacancy rate of 8% at the time of the transaction being reported. Westralia Sqare at St Georges Terrace is a 9-storey A-grade office bilding that was initially offered for sale dring and as part the Insrance Commission of Western Astralia s (ICWA) divestment of their direct property portfolio. Marketing recommenced mid- with GDI prchasing the property in Agst for a reported $. million. A majority of the bilding s NLA expires April, with GDI committing to a major capex program and anticipating high appeal for the space come expiry. East of the core precinct, Adelaide Terrace was acqired by Blackstone as part of the Soth Astralia s Motor Accident Commission (MAC) portfolio. It is or nderstanding that the property was not apportioned a direct sale price. In addition to confirmed sales, there are ongoing negotiations for St Georges Terrace, a refrbished storey B-grade bilding marketed with a. year WALE and % vacancy; and 8 St Georges Terrace, an 8 storey B-grade bilding sitated to the eastern end of the core precinct that failed to find a prchaser from an on-market campaign late. For confirmed sales to a vale of approximately $ million indicate the appetite for conter-cyclical prchasing is strong Address Price $ mil Core Market Yield (%) NLA m² $/m² of NLA WALE yrs Vendor Prchaser Sale Date St Georges Terrace. TBC,,. ICWA GDI Ag William Street. # TBC,, #. CBA Officers Sper Fnd Primewest / GIC l- 9 St Georges Terrace..8^,89,. Charter Hall Prime Office Fnd Far East Org. l Stirling Street 8..,,. Charter Hall Direct Trst Centria l Sorce: Knight Frank Research ^ based pon letting p of the bilding with no significant capital expenditre # approximate, to be confirmed

7 PERTH CBD OFFICE SEPTEMBER RESEARCH Yields After seven $+ million transactions between Agst and ly, sales activity within the Perth CBD stalled, providing a lack of evidence from which to sbstantiate market yields at a time of significant compression being experienced across east coast capital cities. This shortage of transactions was attribted to owners of prime assets being nwilling to divest with a lack of good qality alternative acqisition options, whilst the market was perceived to be too risky for conter -cyclical prchasing with vacancy rates still increasing and effective rents falling. Sales which have recently occrred in now provide strong indication of the latter, with prchasers willing to acqire properties with higher levels of crrent or imminent vacancy. Althogh core market yields can be broadly categorised into Prime (.% to.%) and Secondary (.% to 8.%), the split is more specifically aligned to leasing risk, which is generally a prodct of the vacancy profile of the asset, as well as the locational and asset-specific characteristics. A good example is the December sale of WorkZone East, sitated in a non-core office precinct at Nash Street, bt achieving a.% core market yield de to the long WALE of 9. years and the qality of the improvements. The sale of The Qadrant will provide the best indication of Prime yields, and a sale of St Georges Terrace will do the same for Secondary yields. The crrent yield premim for Perthbased properties compared to an average across east coast capitals is approximately basis points, having tightened from early when frther rental market decline was factored in. The year average differential sits at basis points, sggesting frther tightening may occr, particlarly with rents for Premim and pper A-grade bildings widely considered to have stabilised. An alternative scenario is that as the leasing market improves and incentives redce, vacancy risk allowances incorporated into transactions will be redced. In this instance, asset vales still grow, however the core capitalisation rate is maintained. FIGURE 8 Perth CBD Transaction Yields ly Agst, All Grades, $ millions FIGURE 9 Perth CBD verss East Coast Prime Yields to, East Coast average weighted by PCA Prime stock levels $ % 9.% $ % 8.% $ 8% 8.%.% $ $ % % %.%.%.% bps bps $ 8 St Geroges Tce St Georges Tce Nash St Stirling St 9 St Georges Tce St Georges Tce William St %.%.% l- l- l- l-8 PERTH CBD l-9 l- l- l- l- l- l- EAST COAST (SYD, MEL, BNE ONLY) l- l- SALE PRICE (LHS) INITIAL YIELD (RHS) CORE MARKET YIELD (RHS) Sorce: Knight Frank Valations Otlook Sorce: Knight Frank Research With a decreasing Prime vacancy rate and evidence of face rents having stabilised over the past - months, incentives appear set to ease at the top end of the market, leading to an increase in effective rents. Anecdotally, Knight Frank has already experienced owner relctance to offer the same level of incentives as was necessary to secre tenants months ago. Effective rents have become increasingly prevalent at the lower end of the market, and are anticipated to rise into B-grade as owners cease fnding large pfront incentives. The rise of effective rents has the capacity to impact on asset vales, increasing the likelihood of redevelopments, conversions, and withdrawals. After a qiet period, sales activity has increased with for confirmed transactions, of which all have demonstrated a tightening in yields that was previosly not sbstantiated. Frther transactions anticipated in will assist in demonstrating where the Perth market sits in relation to the rest of Astralia.

8 COMMERCIAL BRIEFING For the latest news, views and analysis of the commercial property market, visit knightfrankblog.com/commercial-briefing/ VALUATIONS Sean Ray Senior Director, Head of Division WA Sean.Ray@a.knightfrank.com Nicholas Locke Valer WA Nicholas.Locke@a.knightfrank.com WESTERN AUSTRALIA Craig Dawson Managing Director WA Craig.Dawson@a.knightfrank.com CAPITAL MARKETS Todd Schaffer Senior Director, Head of Division WA Todd.Schaffer@a.knightfrank.com Andrew Woodley-Page Director WA Andrew.Woodley-Page@a.knightfrank.com OFFICE LEASING Ian Edwards Senior Director, Head of Division WA Ian.Edwards@a.knightfrank.com Greg McAlpine Senior Director, Head of Division WA Greg.McAlpine@a.knightfrank.com Knight Frank Research provides strategic advice, consltancy services and forecasting to a wide range of clients worldwide inclding developers, investors, fnding organisations, corporate instittions and the pblic sector. All or clients recognise the need for expert independent advice cstomised to their specific needs. RECENT MARKET-LEADING RESEARCH PUBLICATIONS GLOBAL CORPORATE SERVICES Bret Madden Director, Head of Division WA Bret.Madden@a.knightfrank.com ASSET MANAGEMENT SERVICES Ryan Abbott Senior Director, Head of Division WA Ryan.Abbott@a.knightfrank.com Canberra Office Market Brief September Parramatta Office Market Brief September Office Market Transactions Update Agst Active Capital Knight Frank Research Reports are available at KnightFrank.com.a/Research Knight Frank This report is pblished for general information only. Althogh high standards have been sed in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resltant from the contents of this docment. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particlar properties or projects. Reprodction of this report in whole or in part is not permitted withot prior consent of, and proper reference to Knight Frank Research.