CBD property in transition

Brett Wilkins has a simple term for the state of Perth’s property market in 1993: survival mode.

“The Australian financial system was on its knees,” Mr Wilkins told Business News.

“The four major banks were in survival mode; their subsidiaries were either totally bankrupt or on their knees and causing the banks serious issues.

“The banks enforced their property position, so they ended up with billions of dollars of properties.

“The banks took control – they seconded in multiple teams from real estate agencies into their workout teams.”

Currently Ray White Commercial WA senior commercial property adviser, Mr Wilkins founded property group Hawaiian in 1993 and was managing director there for seven years.

He said while the industry was facing challenges today, the economic climate was very different.

“If you look at what’s happening in the current market, the banks are not being brutal, they are not heavily enforcing their position … in comparison to 1993 it’s nothing,” Mr Wilkins said.

Three decades ago, the nation’s unemployment rate reached 11 per cent and interest rates were around 17 per cent, compared with 3.5 per cent and 6.7 per cent in 2023.

Sales

The current CBD office market is characterised by a lull in sales activity as buyers wait for interest rates and property valuations to stabilise.

Brookfield’s sale of 108 St Georges Terrace, originally developed by the late Alan Bond in the 1980s, to Lendlease Group and Realside for $340 million in late 2022 was Perth’s most recent significant CBD property deal.

As JLL director of capital markets and industry veteran John Williams explained, transaction activity slowed towards the end of last year as market uncertainty took hold.

“The lull in activity started [in] September, October of last year ... there’s been very little transacted since then,” Mr Williams said.

“If there are any transactions [after that], it’s because they were negotiated prior to that time.”

Mr Williams, who started with JLL in 1995 and has been managing director for the past 11 years, said the availability of capital in the current market was a major difference to the 1990s.

“There wasn’t money around [in the 1990s],” he said.

“The simple reason for that is the accumulation of savings that has happened over the last 30 years.

“Superannuation funds only started in the 1980s, they hadn’t accumulated the funds by the 1990s, so that pool of savings wasn’t there as a safety net to capital values and transactions, but it is absolutely there now.”

He added that while capital was now available, much of it was waiting on the sidelines awaiting a revaluation of commercial office assets.

“There is a huge pile of capital in the form of savings that is looking to get invested, but the gatekeepers of that are reluctant to make a decision at the moment,” Mr Williams said.

“There is a hiatus in activity until we get greater certainty on cost of debt [and] also, because this has been happening there has to be a recalibration of capital values of everything.”

City skyline

Three new developments were added to Perth’s skyline in the early 1990s with the completion of QV1, Central Park and Exchange Tower in 1991 and 1992.

These developments created an oversupply of CBD office space, sending the city’s vacancy rate to record levels of above 30 per cent.

As Mr Wilkins explained, the office towers, which brought more than 165,500 square metres of office space to Perth, were largely built on spec, that is, without pre-commitments in place.

“They were called see-through buildings; you could look at QV1, Central Park and Exchange Tower and see through them,” he said.

“They built them and then the market collapsed, and we didn’t have the economy we have now.” Desperate to fill these buildings, landlords offered significant incentives to lure tenants, including 10-year rent-free periods, among others.

The hiatus in new developments lasted until the early 2000s, when the Perth Convention and Exhibition Centre was built.

Several apartment towers were built as the city’s population grew in the early 2000s, including Manhattan Towers and Upper East Side Apartments, both in East Perth.

Apartment developer Finbar entered East Perth’s apartment market in 2004 with 50-dwelling project 175 Hay; the firm has built more than 2,000 dwellings across 20 developments in the area since.

Recent commercial developments include Brookfield’s Chevron Tower, the Woodside buildings in Capital Square, Brookfield Place and Kings Square.

Developments in the pipeline, including the Edith Cowan University city campus and Brookfield’s second office tower in Elizabeth Quay, are set to change the face of the CBD in coming years.

Economic lessons

In the early 1990s, Australia was experiencing what then prime minister Paul Keating described as the “recession we had to have”, as the effects of the 1987 stock market crash continued to reverberate.

The excesses of the 1980s, where assets transacted well over their value, contributed to a property market crash and the need for adjustments in monetary policy to control inflation.

Investors’ appetite to buy property assets all but diminished, and the state was dealing with the fallout of the questionable business practices associated with the WA Inc era.

As Lavan property and leasing partner Peter Beekink put it, the early 1990s marked a seismic shift in the way businesses operated.

Mr Beekink, who was working at Lavan as a banking and finance lawyer in the early 1990s, said the nation’s economy was facing another turning point today.

“The tough period in the first half of the 1990s resulted in significant reforms that really laid the way for Australia to have consecutive years of growth, and it’s only now that we’re probably having to do another reset,” Mr Beekink told Business News.

Thirty years ago, he said, the business community learned some difficult economic lessons, but those were seemingly forgotten as the economy prospered.

“I think we’re at a point now where we’re having to revisit those lessons,” Mr Beekink said.

“This could be a time where we set ourselves for the next 20 years, because the harsh winds of potential world recession mean that businesses have to get their fundamentals right.

“And that applies to the property industry as well as anybody else. Only the fittest will survive.”