09/06/2011 - 00:00

Investors swoop on strong leasing outlook

09/06/2011 - 00:00

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INVESTORS have been on a spending spree in Perth’s city office market in 2011, buying more than $180 million worth of properties in the first few months of the year.

INVESTORS have been on a spending spree in Perth’s city office market in 2011, buying more than $180 million worth of properties in the first few months of the year.

The sale of five significant CBD properties, including three St Georges Terrace addresses as well as the yet-to-be finalised sale of SAS Trustee Corporation’s half share in the QV1 tower, has bolstered CBD property values and injected new confidence in the city’s commercial sector.

And with at least three other city sites on the market, including the former Clough building at 251 St Georges Terrace and 226 Adelaide Terrace, 2011 is shaping up as a pivotal year for the city.

In less than12 months the sector has gone from moribund, with no significant sales completed in 2010, to forecasts of record rental uptake and growth of up to $70 per square metre in city leases.

It’s a big turnaround from the post-GFC slump, where declining rents and the construction of three new office towers opened up a substantial gap between the expectations of buyers and sellers.

Perth Property syndicator Primewest has just sold its office property at 89 St George Terrace for $31.7 million. Director John Bond said the sale underlined a narrowing of the gap between owners and investors, underpinned by the strengthening leasing market in the past six months.

“It’s hard to catch up on a market when it’s falling on you and you tend to take a while to deal with the shock of that,” Mr Bond told WA Business News.

“And sellers, in circumstances where values have probably come down are reluctant and so there was a bit of a gap in expectations between buyers and sellers.”

Jones Lang LaSalle managing director John Williams said negotiations for the sale of 89 St Georges Terrace indicated a renewed optimism and confidence from investors who had sat on the sidelines in 2010.

The sale price represents a rate of $7,081/sqm for the 4,476sqm property and suggested indicative capital growth of at least 18 per cent from 2010.

He said the sale price and square metre rate was in line with other recent CBD transactions such as 30 The Esplanade and 99 St Georges Terrace.

“But more importantly it confirms that buyers are increasingly prepared to accept lower yields in anticipation of growth,” Mr Williams said.

The uptake of city office space hit an historical high of 24,600sqm in the first quarter of 2011, coming off the back of 2010’s record net absorption rate of 103,000sqm.

Analysts suggest the take-up could be as high as 25,000sqm this quarter and with only a samll number of unleased city developments scheduled for completion before 2015, there is already talk of supply shortages.

BHP Billiton’s new headquarters at City Square is scheduled to be completed by early 2012 and property owner Brookfield Office Properties is already working on plans for a second tower on an adjoining site it bought from Griffin Coal last year.

This tower, a project on the Old Melbourne Hotel site, and a development at 999 Hay Street will add about 45,000sqm to the city market.

CB Richard Ellis has forecast CBD rental growth to average 4.2 per cent a year for the next five years and the vacancy rate to fall from 9.5 per cent in January this year to 6.5 per cent by July.

Savills WA divisional director of investment sales Miles Rowe said vacancy rates had fallen faster than forecast and he expected a better-than-expected result from the July data.

“Once that occurs it will be a fairly major wake-up call to tenants in the market as to how tight things are,” he said.

Mr Rowe said the volume of sales transactions this year indicated buyers saw a “window of opportunity” and the city was on the radar for the major Australian real estate investment trusts.

“Our leasing guys are worried about shortages of stock, we had forecast an increase in the vacancy rate from backfill space as BHP moved out of their existing premises but it’s becoming apparent that they may well retain a lot of that space for growth,” he said.

High construction costs in Perth as well as the long lead times for major, new projects are likely to benefit sitting owners in upcoming lease negotiations.

The waterfront redevelopment and the City Link Project will both include significant office developments but the long development timelines for these projects will not ease supply pressure in medium term.

Colliers International director of agency Brett Wilkins forecast an acute shortage of office space as supply outpaced demand.

He said there was very little space coming onto the market and rents in the past three months had increased by $50 to $70 a metre across the board.

“There is certainly increased interest right across the board from foreign trusts and individuals, syndicators and eastern states institutions,” Mr Wilkins told WA Business News.

“Last year there were very few sales in the city, it was dead and there is now a renewed interest and confidence in the Perth property market.

“New development will happen but if someone pushed the button tomorrow morning on a new development it’s a good three years before they are going to be able to offer the space.”

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