Savills Australia comments on the year that was 2018 in Perth

Perth CBD, city-fringe office markets race to strong finish

Asian capital has continued its aggressive infiltration into Perth’s A-grade commercial property market throughout 2018, with prime yields sitting on par with pre-Global Financial Crisis levels.

Savills Perth has brokered several significant deals and witnessed a number of new trends emerging, with the $125.25million transaction of WorkZone West setting the bar high in the first half of the year.

Associate director of Capital Transactions, Nick Charlton, said that 2018’s deals demonstrated the volume of investors showing an interest in CBD and city-fringe assets, and that there had been “a considerable uptick in the past 12 months from interstate and Asian investors”.

“The Exchange Tower at 2 The Esplanade is yet to settle but rumoured to fetch $320million, a remarkable turn for the Perth CBD office market, with three suspected bidders looking to secure 100 percent interest in the full asset,” he said.

“836 Wellington Street was contracted for $91.33million and underpins the appetite for long-dated secure income-producing assets.

“Yet to be contracted but under offer is 76 Kings Park Road, a West Perth property that saw several rounds of bidding, highlights the pent-up demand for the city-fringe office market.”

Mr Charlton went on to say that the strong interest in assets valued at more than $200million illustrated Perth’s popularity with counter-cyclical investors who are fully engaged with the recovery being seen in the occupational leasing market.

“In previous cycles, it has typically been difficult to trade assets in this segment of the market,” he said.

“The depth of bidding on the Exchange Tower exemplifies the popularity of premium and high-quality Agrade assets being experienced in 2018 among these investor groups.”

Mr Charlton said Perth continued to experience a “flight to quality phenomenon”, creating “a two-speed market, with vacancy rates down to 4.1 per cent in the premium sector of the market”.

He also said that the lack of quality contiguous floorplates was resulting in a lack of choice for large space requirements.

This year, Chevron confirmed it will move its operations to Elizabeth Quay, which Mr Charlton predicts will positively influence the entire precinct.

“Similarly, we’ve witnessed a resurgence of investment from the major mining groups, and the knock-on effect this will have for space requirements in the coming three to five years will drive office demand,” he said.

Looking to 2019, Mr Charlton said he was expecting an increase in transaction volume, as more investors seek to take advantage of positive recovery in the Perth office market.

“Strong interest from east coast and offshore buyers will remain, as the lack of stock in Sydney, combined with Perth’s attractive yields and strong recovery in occupancy rates, prove attractive.

“A reduction in yield spreads and capital value premiums between the Perth and Sydney markets is anticipated, as the Sydney market cools.”

Perth industrial property overcomes tough 2018

Perth’s industrial market has made a comeback in the second half of 2018, following the quietest six-month period in 15 years, according to one industry expert.

Savills Perth overcame the struggle, managing to broker several significant deals, including the sales of two major ex-Masters Home Improvement sites, which sold in July to separate buyers for a combined total of $18.1million.

The two sites at 7 Sobek Pass, Bibra Lake, and 600 Ranford Road, Forrestdale, were snapped up within four weeks of being released to market, with the majority of interest coming from owner-occupiers taking advantage of the low interest rate environment and Perth’s subdued Perth market.

Two leasing deals to note included CTI Logistics securing a 14,000sqm warehouse at 841 Abernethy Road, Forrestfield, and Mainfreight securing a 6,000sqm facility at 33 Miles Road, Kewdale.

“2018 will be known as the year of lease renewals, whereby tenants renegotiated with their existing landlords for better terms,” Industrial and Business Services director, James Condon, said.

Mr Condon went on to say that industrial investment property was still tightly held by “a handful of Perth privates and a few real estate investment trusts”.

“Yields are tracking at a 0.75 per cent discount to the eastern seaboard, while vacancy levels and incentives are circa 10 per cent, which is substantially healthier than the office market,” he said.

Looking to 2019, Mr Condon said the market would likely mimic traits of 2018.

“We expect the challenging leasing market to continue, with a pick-up towards the second half of the year, on the back of resource projects and the mining sector turning the corner.”

Mr Condon witnessed an influx of supply chain consultants enter the market, as well as an increase in industrial tenant representatives advising corporations on their properties.

“Five years ago, very few industrial tenants were represented by an agent,” he said.

“Now about 25 per cent are represented by an agent, and this figure will continue to increase as Corporations see value in having an agent represent them on the tenant lease negotiations.”

Savills invested heavily in this space this year, forming a strategic alliance with SA1 Property, which specialises in supply chain analytics.

“SA1 Property offers a service to our industrial team that our competitors do not offer,” Mr Condon said.

“These analytics enable companies to make smart decisions and drive down costs when considering their relocation costs.”

2018 signals the year of Perth’s two-tiered office leasing market

Perth’s office leasing market will continue to see tenants take full advantage of favourable leasing conditions and generous incentives, according to one commercial property agency.

Savills Australia expects the two-tiered market of 2018 to transfer into 2019, with a string of recent deals, such as ABN Group for 8,500sqm and the Western Australia Police Force for 20,000sqm, holding the potential to drive the headline vacancy rate below 19.4 per cent for the first time since 2015.

WA state director of Office Leasing, Shelley Ritter, said lower-grade office stock had been skewing vacancy figures, with no contiguous space options available in the current 10,000sqm-plus market.

“Finding contiguous space is going to be difficult for firms coming to market seeking space of 5,000 to 10,00sqm, with only a handful of properties able to cater to this demand,” she said.

“Difficulty in finding large contiguous space has the potential to result in new developments coming to fruition.

“The 50,000sqm Chevron tower in Elizabeth Quay, along with progression on the Plus Tower Project and the Esplanade Busport redevelopment, are positive signs that the market is heading in the right direction.”

The premium office space market is experiencing a different trend, with properties such as 240 Georges Terrace and the Central Park tower presenting a vacancy rate of 4.1 per cent.

Leasing success at 240 Georges Terrace highlights the demand for high-quality space, with deals to Macqurie Bank for 3,311sqm at a rate of XX per sqm, and Wood Group for 9,198sqm at a rate of XX per sqm.

“Incentives are tapered back with sizable vacant space, offering a slight increase in effective rental growth for landlords,” Ms Ritter said.

Looking forward, an uptick in business investment and a more confident outlook for the mining sector is supporting jobs growth throughout Western Australia, with BHP, Rio Tinto and FMG committing a total of $9.4billion to the their South Flank ($4.7billion), Koodaideri ($3billion) and Eliwana ($1.7billion) mines respectively.

“Demand for space by specialist mining firms and the associated service firms are expected to drive office absorption through the coming years,” Ms Ritter said.

“This outlook is underpinned by the growth among the state’s office and industrial job advertisements being the highest nationally.”

By: JAGONAL