Perth office market finds rare air

Major players making major deals was the dominant feature of Perth’s commercial office market in 2006, as yields and office vacancies tightened and rents skyrocketed.

Some property pundits have even called it the strongest commercial market Perth has experienced in two decades.

Savills Research estimated $1.2 billion worth of office property valued above the $1 million mark was transacted in the Perth metropolitan area in the year to December 2006, up a staggering 93 per cent from $638 million in 2005.

This figure is still up on the three-year average of $720 million.

By far the biggest sale was the spending spree by GE Real Estate, which paid $465 million for a portfolio of prime office properties in Perth and West Perth.

The buying spree was capped off in December with the acquisition of Allendale Square at 77 St Georges Terrace and Allendale II at 12 The Esplanade, rumoured to have cost GE a total of $220 million and netted owner Cape Bouvard Investments and the Sarich family a tidy profit.

Savills divisional director of investment sales, Miles Rowe, told WA Business News the size of the GE portfolio sale was quite rare in the Perth market as was the case of very strong prices and clean deals being offered.

“Two to three years ago we were banging on doors in Sydney and Melbourne with little response; now the perception of Perth has changed so much that a lot of investors are coming to us,” Mr Rowe said.

Mr Rowe countered suggestions that GE may have bought office properties with yields as low as six per cent by saying it was a case of buyer perception and what returns they could handle.

“If they can work with it, they will be prepared to bid aggressively for it,” he said.

Like GE, Stockland has also been targeting Perth office property, emerging recently from the hotly contested market with the Reserve Bank building at 45 St Georges Terrace for $57.3 million and a half share in the 52-storey BankWest tower for $134 million.

The latter sale, between Stockland and Valad Property Group, is conditional upon Multiplex, with its remaining half share in the BankWest tower, not exercising pre-emptive rights within the next two months. 

These sales, together with Stockland’s purchase of the Durack Centre at 263 Adelaide Terrace for $49.1 million in October, take the Perth component of its commercial portfolio to 15 per cent.

Stockland’s Durack Centre purchase was also one of the more surprising deals of 2006, made possible when it swapped its $55 million 50 Pitt Street office tower in Sydney with Durack Centre owner, Hawaiian.

Stockland CEO commercial and industrial, Steve Mann, said the Perth market continued to show a stellar performance, with a tight leasing market and solid forecast rental growth being driven by strong employment and limited new construction.

“Large increases in construction costs are causing economic rents for new buildings to rise, which will underpin future rental growth,” Mr Mann said.

Other prominent commercial deals to occupy Perth boardrooms involved the sale of a half share in St Georges Square at 225 St Georges Terrace, the imposing Hatch Building on Stirling Street, and Emirates House, all of which have gone to Sydney-based Charter Hall Group.

The company has just settled the $61.5 million sale of a half share in St Georges Square with the Wylie Group, which was first announced in September, and will issue 18 million Charter Hall Group stapled securities as part of the transaction.

September was also the month of Perth’s biggest individual sale, albeit an inter-company transfer.

AMP Capital Investors shifted 140 St Georges Terrace in-house for $153.5 million.

Property Council of WA executive director Joe Lenzo said there were two issues affecting the commercial market in 2006, which would still impact on Perth in the new year – institutional investors with deep pockets and the poor availability of stock.

Mr Lenzo said rental returns had been strong as vacancy rates in the CBD approached zero.

“There’s no doubt that right now and for the rest of 2007 the demand for office space will increase and we may see some more sales moves happening later in the year,” he said.

Large resource companies looking for additional space were looking to the CBD fringe suburbs of Subiaco, East Perth and Leederville, Mr Lenzo said, as temporary measures to overcome low vacancies in the city.

The affect of Perth’s space squeeze is reportedly being felt across big business in the CBD, with some major companies deciding not to bring key employees over from the eastern states because of the problem.

Mr Lenzo said private sector companies were averaging employee space ratios of between 10 and 11 square metres, and this was having a direct effect on the efficiency of prominent city buildings.

“Some of these buildings are having difficulties coping. Air-conditioning loads have increased and lift operations are under pressure,” he said.

“When you’re bursting at the seams it's difficult to be efficient.”

CB Richard Ellis property analyst Michael Olsen confirmed Perth office vacancies had fallen from 5.8 per cent in the beginning of 2006 to around 1 per cent at present.

“Decent stock is still a long way away so I think we’ll see strong double digit growth in rents this year,” Mr Olsen said.

He estimates between 15,000sq m and 20,000sq m of space will become available in 2007, but this is likely to be scattered across the CBD and mostly the result of refurbishments on old stock.

However, commercial agents and tenants alike are looking forward to 2009, when at least three new office buildings come on-line and a hive of office reshuffling activity is expected.

The first developers to get their projects off the ground in 2006 were ISPT, Pivot Group and Axiom, which have started work on a retail and commercial complex on the former Toys-R-Us site on Hay Street.

The speculative move was then followed by Hawaiian and Multiplex late last year, which have begun construction on the smaller of two towers at their Bishops See site, creating about 7,000sq m of office space.