19/10/2011 - 10:17

City office market braces for record run

19/10/2011 - 10:17

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City office market braces for record run

A FEDERAL government employee superannuation fund is understood to be circling SAS Trustee Corporation’s half share in the blue-chip QV1 office tower in Perth’s sought-after CBD.

The Australian Reward Investment Alliance or ARIA is thought to be undertaking due diligence on the tower and sources close to the deal suggest the sale price will set a new benchmark for city office prices.

Dexus Property Group, which has a mandate to manage QV1 on behalf of SAS, was not willing to make any comment on the sale campaign, which was first mooted in August last year.

In late May, the Queensland Investment Corporation (QIC) was touted as a front-runner in negotiations to buy the half share but the talks collapsed, sparking speculation QV1’s biggest tenant, US energy giant Chevron, was considering quitting the tower to develop its own city office property.

Chevron remains tight-lipped about its plans but persistent rumours suggest it has run the ruler over a site within the state government’s city foreshore precinct.

One source close to the energy behemoth said it was still keen to get its operation “under one roof” but it was not settled on the best way to achieve this.

The city’s ever-tightening vacancy rate is likely to have offset any fears that Chevron’s potential departure from QV1 could affect its value.

The Property Council of Australia’s latest office data put Perth’s vacancy rate at 7.8 per cent but analysts suggest the real figure is closer to 3 per cent and heading down towards zero.

Property analysts also point to a fundamental shift in Perth’s status in the global mining industry and its evolution from a branch office economy to an international mining centre.

As a consequence, resources companies like BHP Billiton and Chevron are taking a long-term view on their investment in Perth’s office market.

BHP Billiton’s yet-to-be-completed new headquarters in City Square will go some way to ease pressure in 2012, but it’s understood the mining giant is likely to retain a significant proportion of its existing office space in Central Park.

CBRE senior director of office services Andrew Denny said the rapid expansion of BHP Billiton’s office footprint in the CBD graphically illustrated the drivers behind the city’s ever-tightening vacancy rate.

When BHP Billiton first signed up to the City Square development in 2007 it agreed to take up a lease for 40,000sqm to house all its Perth operations.

This was quickly increased to 60,000sqm but by the time it moves into City Square next year, BHP Billiton will have close to 90,000sqm of office space in Perth.

This includes space in Central Park, 225 St Georges Terrace and a training centre at 166 Murray Street.

“I doubt there is an office leasing market in the world like Perth at the moment … the city is becoming a world centre for oil and gas,” Mr Denny said.

CBRE is predicting further rental growth in 2012 but not at anything like the levels of the last boom, when in 2006-07 rents rocketed by as much as 70 per cent.

The top rent in Perth’s office market is $850/sqm, which was achieved in the QV1 building but analysts suggest new deals will quickly surpass this and breach the $1000/sqm mark.

The outlook has been robust enough to lure developer Luke Saraceni back into the fray, after he announced plans last week to build a 28,000sqm office project on Shafto Lane in partnership with Diploma Group.

An anchor tenant has not been named but it’s understood a number of parties are in discussions over space in the new project.

While the vacancy rate is headed south, Knight Frank state director of asset services, Ian Edwards, predicted 2012 would see a number of small to medium-sized office developments get the green light.

“In the first half of the year a number of tenants will commit to new projects … and we are saying 2013 will be the spike year for rents,” Mr Edwards said.

Analysts suggest the four most likely projects to get the go ahead next year will be the second stage of City Square, the redevelopment of the Old Melbourne site, 999 Hay Street and Mr Saraceni’s proposal for 396 Murray Street.

However, conditions for kick-starting a new major office tower in the city are still uncertain.

The banks and financial institutions are still demanding pre-commitments representing at least 50 per cent of the total office space to fund new projects.

This represents a big hurdle because, despite the rapid growth of the resources and energy tenants in Perth, the number of businesses that could sign up to a 30,000sqm anchor lease is still very small.

“That means you just won’t see anything much larger than 28,000 even proposed in the current round of development,” Colliers International director of leasing David Cresp said.

“By early next year we will be facing a critical shortage of space and that will be fixed up briefly when the new supply comes on but that will be quickly snapped up and we will be back into a market that needs new space.”

Despite these predictions of critical shortages, Mr Cresp was optimistic there were options for tenants and developers would move quickly to meet demand.

“This time around the developers are ready and there are a number of buildings proposed … but tenants need to be forward thinking and commit to some new buildings to ensure that we do get some new supply around the 2014 period,” he said.

“Companies are now starting to have more of a 10 to 20-year view, they see they need to be in Perth for the long term and that this mining phenomenon is not a one-year or two-year phenomenon.”

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