CBD project squeeze

DURING the past three years, the influx of cranes into the Perth CBD has provided a strong visual reminder of the strength of Western Australia's economy and the buoyancy in the property sector.

However, tightening credit markets and an ongoing escalation in construction costs may be threatening some of the city's major office and apartment projects, according to finance brokers and property analysts.

Last week, Brookfield Multiplex denied industry speculation that its City Square office tower - future home of anchor tenant BHP Billiton - was facing viability issues.

The developer would not comment on whether discussions had been held on the future of the project, but said construction works were progressing.

Meanwhile, Saville Australia has placed part of its Capital Square site on the market, and faces the prospect of its remaining apartment tower being shelved, after failing to lock down a builder.

Prospective development partner Leighton Properties this week ruled out taking a stake in the revised office project, after discussions with the holding company - jointly owned by Saville and Babcock & Brown - failed to produce a deal.

Leighton has stated it intends to lodge a bid for the site through the sales process, with the intention of building the proposed 60,000 square metre office tower, either independently or through a joint venture.

One property finance broker told WA Business News that, despite tightening credit conditions, finance was still available for projects with solid leasing and sales levels.

However, he said pre-sales of apartments, as well as office space pre-commitments, would become more important in determining whether finance could be secured.

"[Saville is] telling everyone they've got pre-sales away, but I think there would have to be some question mark over that. If they had pre-sales, they would be able to get a builder and finance [after that]," he said.

Projects such as City Square - in which BHP has pre-committed almost two thirds of the 65,000sqm of office space - are likely to continue to be viable, the source said, albeit with a greater spread of risk between financiers.

"Because the debt level required is so large, and they have a big tenant...the project can no longer be financed by one or two banks - they'll need four or five. It might take a little bit of time to get the banks lined up," the broker said.

"[Financing] was going to be an issue from the start because of the size of the debt associated with the project."

Another Brookfield Multiplex project, Bishops See stage two, which is being undertaken through a joint venture with developer Hawaiian, is yet to sign a deal with its preferred anchor tenant, the Department of Premier and Cabinet.

It joins a list of proposed office towers that are yet to sign anchor tenants and are unlikely to get funding without significant pre-commitments.

These include Stockland's $34.5 million second Durack tower, Finbar's proposed building on the old Fairlanes bowling site, Griffin Group's tower adjacent to City Square, and the redevelopment of both the Grosvenor and Melbourne hotels.

Another property source said the situation was similar to the late 1980s.

"What seems to happen is you get this huge correction in regard to commodity prices and construction costs," he said.

"There will be a correction and good buying opportunities in due course."