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Lease window closing

PERTH’S major commercial properties have diverted a critical portion of their lease exposure threat by pushing out lease renewal terms to 10 years, further closing the window of opportunity for Perth’s three major commercial development proposals.

Solomon Brothers in Exchange Plaza, Portman Limited and Robe River Mining in The Quadrant, and AON Risk Services Australia Limited in QV1 have all signed 10-year leases.

Colliers International research manager David Cresp said tenant incentives, plus building owners’ enthusiasm to secure tenants over the lease exposure period, had played a part in the appearance of the 10-year lease trend.

Fixed rental increases, significant rent-free periods and office fit-out are among the incentives that have enabled building owners to secure their prime tenants.

While Woodside is currently under construction and the Next Building is going ahead on a purely speculative basis, three other major developments – Future 239, 100 St Georges Terrace and Westralia Square – and a number of smaller developments are waiting in the wings, Mr Cresp said.

Of three major developments, Project Future 239 was the most likely to go ahead on a speculative basis, according to industry sources.

Property developers have been further stymied by some of Perth’s bigger tenants opting to either sign new leases, moving out of the CBD or giving pre-committal to a development.

WA Business News understands that Perth’s most sought after tenant, Ernst and Young, is in the final throes of committing to the Convention Centre office space.

Ernst and Young’s lease with Central Park expires in May 2005, around the time Multiplex would have completed the office building.

QV1 has managed to entice Freehills onto a lease, chalking up 6000 square metres of occupied office space and taking out a market player many local property developers were chasing.

PricewaterhouseCooper and Clayton Utz are also recent QV1 conquests.

Seal Corp will utilise its five-year option in Central Park, taking its lease expiry out to 2008.

Mr Cresp said that, by pushing out commercial leases from three to five years to 10 years, building owners could get through the 2005-2006 period when proposed building developments would have been expected to be finished.

“It definitely has made it hard getting any new building up off the ground, whereas 12 months ago it really looked like one of them would go,” he said.

Mr Cresp said that most of the major development proposals had office space of 30,000sqm.

“To go ahead they would probably need a 30 per cent pre-committal, that’s 10,000 square metres they need signed up; that’s going to be hard,” he said.

Another stumbling block for developers is the commercial property market’s resistance to the rent level new buildings were demanding.

“The new buildings are asking a rent of $350 to $360 per square metre, whereas the market rent in existing buildings is $330 to $340 a square metre,” Mr Cresp said.

“Taking into account that the new building would not be completed for another two or three years, the market has showed resistance to rent at this level.”

NSC Corporate director Steve Carulli said Perth’s lease expiry profile peaked in 2004-2005. After that it was locked away for a further 10 years, ending the development cycle.

Developers knew they had to beat the lease expiry profile and the general market, but had not expected the shift of firms like SGIO, CSC or Hatch out of the Perth CBD, he said.

“We expect to see more fringe city design and construct type developments with smaller, more boutique developments in the city,” Mr Carulli said.

While there were a large number of tenants with lease expiry dates between now and 2005, Mr Carulli said it was unlikely they would move if they were sitting in a good fit-out and their existing building was offering attractive incentives.

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