Commercial development, sales stall

Developers are stepping away from new office projects at the same time investment activity in Perth’s CBD hits an all-time low. 

Singapore's Fragrance Group is planning to convert the commercial component of its newly acquired Milligan Square project into apartments, in a further illustration of the bleak prospects facing office developers in Western Australia.

Fragrance Group last week picked up an option to purchase a development site on Milligan Street from Georgiou Capital for $30 million.

The site, known as Milligan Square, has approval for construction of a two-tower commercial and hotel project, comprising a 15-storey office building and a 132-room hotel.

JLL sales and investments manager Sean Flynn, who brokered the sale on behalf of Georgiou, said the Singaporean developer was planning to eschew the office tower in favour of a residential apartments project.

“Certainly the office market is under strain with vacancy rates and incentives the way that they are, and it would have been difficult to achieve a pre-commitment for an office development,” Mr Flynn told Business News.

“Georgiou had the opportunity to talk to an offshore developer whose focus is residential, hospitality and hotel accommodation, and the site had a hotel component to the development approval so there was a little bit of the right flavour to the proposal already.

“It was just a matter of converting the office component to a residential tower.”

The deal is the second major CBD site holding development approval for a significant office project set to be converted into a residential tower in recent months, following the Uniting Church’s decision to alter its development application from a 22-storey office building to a 35-level apartment tower.

The office proposal was reliant on finding an anchor tenant to take up the majority of the space in the building, a task that is becoming increasingly difficult in the Perth CBD.

Mr Flynn said he expected residential projects to remain strong over the next 12 months, in stark contrast to the weakness being experienced in the commercial market.

He said the majority of interest coming from offshore investors was on apartment projects rather than office developments.

There have been just three significant office transactions in 2014: the $91 million sale of the Septimus Roe office tower at 256 Adelaide Terrace, which was bought by Far East Organisation; the $90 million sale of the office building at 130 Stirling Street, bought by Hiap Hoe; and the recently settled $35 million sale of 220 St Georges Terrace to a local private buyer.

Knight Frank managing director John Corbett said most owners were unwilling to sell because it was more favourable, investment-wise, to buy assets than offload them.

“Markets go in cycles; right now the market has softened for offices and vacancies have gone up, but over the next three years or so that will probably change,” Mr Corbett said.

“There is a weight of money overseas looking for investment property here as well as local investors that are cashed up, and the simple reality is yields may come down.

“If you leave your money in the bank you get about 3.5 per cent and yields on investment property are around 7 per cent or more.

“Basically it’s not a bad time to buy property because you can get a better return.”

JLL managing director John Williams agreed that the major contributing factor to the dearth of office sales in 2014 was that no building owners in the Perth CBD were under pressure to sell their assets.

“When you have a market where nobody needs to sell, you have what’s happened this year – nothing happens,” Mr Williams said.

“There are people who want to buy assets, but they are being overly cautious and negative on the pricings.

“You have this impasse between buyers and sellers which means we don’t have any transactions.”