20/07/2015 - 06:02

Equilibrium shifts to tenants

20/07/2015 - 06:02

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Will the age-old arm wrestle between renting and ownership result in too much pain as momentum changes?

Will the age-old arm wrestle between renting and ownership result in too much pain as momentum changes?

Commercial property development naturally lags the underlying business cycle that drives it.

Fewer better examples could be offered than the Perth office building boom that’s coming to an end, delivering a record supply cycle just when it is least needed.

After 2015, there will be just two major commercial buildings being constructed in Perth’s CBD – Woodside Petroleum’s new headquarters, and an office tower at 480 Hay Street (including a Westin Hotel) to be built by BGC.

The pipeline of proposed works is slim. Industry hopes that Chevron will go ahead with its project at Elizabeth Quay are not on particularly solid foundations, despite it having a global track record of owning properties in which it resides.

All this might mean the cranes that have dominated Perth’s skyline will disappear for the first time in a decade.

There will be pain from this part of the cycle.

Tenants that have been forced to pay top dollar or settle for inadequate accommodation will be enjoying the opportunity to get a better deal in these cost-conscious times. That they may be seeking less space, rather than more, makes the deals even more painful.

Owners of older buildings will be feeling this most. New builds can offer tenants end of trip, luxury bathrooms, kitchen facilities and energy efficiency, while the older buildings need to refurbish to keep up.

This is costly and problematic. Refurbishing a building is not optional with tenants and changing its use is even more fraught, especially for a conversion from office to residential in a market awash with new apartments.

But that is the nature of large commercial property development, and those involved need to have the balance sheets to take the pain until the cycle swings back in their favour, as it inevitably will.

At this stage there is little sign of landlords panicking. With interest rates low and listed office owners generally better structured, there ought not be the same pressure for forced sales as there has been in downturns past.

It will be interesting to see how the Insurance Council of Western Australia’s property asset divestment goes. The Forrest Centre, Westralia Plaza, and Westralia Square are all on the market, offering a litmus test to how major investors view the long-term fundamentals of WA’s market.

In the end, what all business wants is a balanced market where neither landlords nor tenants have too much of an edge, and the cost of accommodation is internationally competitive.

Let’s hope it settles down to that.

In the interim, Perth is a better place. It’s not just volumetrically much bigger or more geographically spread; for the high prices they were paying, tenants demanded better conditions for their staff. The result is many more exciting places that ensure the CBD is more than just catering for the most basic needs of office workers during the working day.

It is much more vibrant, attractive and, for retail and hospitality businesses in the CBD, much more sustainable.

Commercial developers won’t be lost for work either.

Metropolitan Perth has expanded rapidly and many crucial services have not been delivered due to the pace of change or the cost of competing with the resources sector for construction labour.

That is changing – particularly with retailers and developers quietly confident that the long-term fundamentals of Perth are strong.

The challenge will be to keep construction moving at a reasonable pace to ensure this skilled workforce has plenty to do.

The alternative is for the government to step in with more infrastructure requirements but, as we’ve noted before, the state is not well placed financially to do that at the moment; in any event, this newspaper prefers market stimulation is naturally provided by a confident private sector, rather than artificially created by technocrats trying to do good.


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