Cautious subtext to office outlook

Developers are lining up for a piece of the next phase of Perth’s office market action to capitalise on the solid returns promised by high rents and current vacancy rates of 3.5 per cent.

While most local commercial agents believe new space is sorely needed, others warn of the risk of over-building and creating too much stock during the current cycle.

Jones Lang LaSalle director of commercial sales, John Williams, told WA Business News the race was on to build, considering office rents had increased by up to 80 per cent in the past year.

Mr Williams said there would be low vacancy rate periods and an increase in rental growth between now and 2010 and, but he believed there was only a small window of opportunity.

“With the next major building due in 2008 and more supply in suburban markets to come on in the same period, investors must deliver before then,” he said. 

Savills divisional director of investment sales, Miles Rowe, said commercial investors were already buying land in suburban locations to build offices. 

Mr Rowe said there was a major shortage of stock and it was also a good time to sell because of rental growth and increases in property values.

“We need more stock in suburban locations and there is still potential to amalgamate sites in Leederville, East Perth, along Beaufort Street Mount Lawley and in some areas of West Perth,” he said.

This potential is more evident when the movement of non-traditional CBD tenants out of Perth and into commercial fringe suburbs – due to a large degree to crippling rent and car parking fees – is considered.

NSC Corporate joint managing director Steve Curulli said tenants had been overpaying on rent for the past five years and, as a result, developers were more prepared to create the next wave of stock.

Besides building from scratch, he said refurbishments were common and inquiry for this space was strong.

“Agencies are not at all pessimistic about the tight vacancies. What we’re seeing is organic growth and free-flowing inquiry,” he told WA Business News.

Mr Curulli said there remained a risk of overbuilding coupled with an economic downturn, as had occurred in 2000-01 when some major oil and gas projects stalled, causing up to 5,000 square metres of space to flood the market and leaving investors to deal with a tenants’ market.

Other risks inherent with investing at this time refer to yield compression and the purchase of properties attracting a higher than normal risk of return.

Jones Lang LaSalle’s strategic analyst, Andrew Bouhlas, confirmed that yields had fallen over the June quarter and were expected to tighten further in 2006.

Prime yields now range between 6.75 per cent and 8 per cent, while secondary yields have tightened by a full percentage point in three months to range between 7.5 per cent and 9 per cent.

“We’ve seen capital values almost break the $5,000/sq m barrier, currently at $4,900/sq m, a jump of more than 18 per cent for the quarter and an impressive 40 per cent over the last 12 months,” Mr Bouhlas said.

Mirvac Fini chief executive Adrian Fini said there was a great weight of capital in Perth and investors should be cautious of the risk of further yield compression in the commercial market.

Mr Fini had noted a strong movement of B-grade properties among investors above what would be their normal risk limits.

“Perth has a very strong market at present with high wage inflation and labour shortages pushing some tenants out of the CBD,” Mr Fini said.

The outflow of tenants had resulted in areas such as Osborne Park, Innaloo, Herdsman, parts of Burswood and Victoria Park, experiencing resurgent demand for commercial offices, he said.