Signs strong for real estate

After a rapid turnaround in the commercial property sector during the past year, property commentators are forecasting a bumper five years ahead, with the market riding on the back of the bounding resources economy.

While the CBD office market has had record sales this year, and quickly sucked up vacant space, replacing that space is no simple exercise, with a two- to three-year lead-time for any new office building.

And with four major private proposals for new office buildings – 100 St Georges Terrace, Bishops See, Raine Square, and Westralia Square – as well as two proposals involving government – 140 William Street and the Old Treasury Buildings – it seems certain that Perth’s skyline will change.

The extent of this varies, however, with some more optimistic than others.

Developer and president of the WA branch of the Property Council, Luke Saraceni (who owns Raine Square in partnership with Hossean Pourzand), said he had no doubt all four proposals would be out of the ground and built in the next five years with no oversupply issues.

“By 2010 the property market will be at an absolute peak and possibly heading towards a potential crash, but not at least until then,” Mr Saraceni said.

He added that there were three factors controlling property that would prevent a boom-bust situation, and keep the current climate “humming along”.

“Although banks are flush with funds, they require a significant amount of equity and precommitment before they will commit, which is a very strong mechanism to control supply,” Mr Saraceni said.

“Also, there is a huge amount of money going into super funds, which is looking for a home, and property is a natural fit for that.

“Finally, some economists are predicting relatively stable interest rates for almost the next 10 years, which will keep the property sector stable.”

NSC Corporate joint managing director Steve Carulli was more cautious about the potential of big development sites, saying he believed the next round of development would be on the city fringe and was more likely to be small buildings.

“The big development sites have such a critical mass requirement in terms of precommitment, they are much more difficult to make happen,” Mr Carulli told WA Business News.

He said rents would fuel the whole development phase, and that they were heading up; but the increase was more of a market correction, which was needed a long time ago.

“Strata offices will continue to be a growth sector as well,” Mr Carulli said.

Savills WA managing director Paul Craig said the Perth office market was one of the most attractive office markets in the country, with the forecast of significant rental growth attracting potential buyers.

“Rising costs and a two- to three-year construction timeframe for proposed developments have increased the economic rent for new office buildings in Perth,” he said.

“Coupled with a significant fall in vacancy over 2005, we will see significant rental growth in the next three to four years.”

Mr Carulli said Savills Research forecast Perth CBD nominal effective rental growth to average 10 per cent a year in the next three years, and 8 per cent a year over the next five years.

Burgess Rawson managing director Geoff Potter said it would become increasingly harder for tenants to find space in the next few years, with many deciding to stay put and renew existing leases.

“People aren’t shifting for the sake of it, but if they can’t fit in their old space they have no choice, and there aren’t a lot of options around,” he said.

Mr Potter said rents would need to get up to around $400 a square metre before a new office tower got out of the ground.

And existing building owners and developers are paying greater attention to energy efficiency and sustainability, following the state government’s announcement this year that it requires commercial buildings have a green-star rating of at least three and a half before it will consider a tenanting agreement.

CB Richard Ellis research analyst Michael Olsen said there was a huge investment demand across the field for the office sector, and that the biggest question was oversupply.

“We will probably see two new buildings start next year, which won’t come on until about 2009, and we are forecasting vacancy rates below 4 per cent at that stage,” Mr Olsen said.

“There is good potential in existing B-grade buildings being bought and refurbished to cater for demand.”

The retail sector is also forecast to perform strongly in the next five years, being driven by strong population growth and the growing economy.

CBD retail in particular is expected to experience a resurgence, with several proposed retail developments, an increasing inner-city population and favourable retail trading hours adding to the opportunities.

Lease Equity director Jim Tsagalis said there were at least three years of substantial growth in the economy, which had a trickle effect into retail.

“More and more people will be attracted to the city with new developments and a huge amount of new retail coming to the city – the location and dynamics of what is going on is fantastic,” he said.

Savills research manager Belinda Nowland said Access Economics forecast Western Australia to have the highest turnover growth for any state in Australia for the medium term.

“This is supported by fundamentals such as high levels of residential construction, a rise in home values and the positive effect the resource sector is having on the economy,” she said.

Savills director of retail leasing Chris Ireland said a number of national retail tenants would be entering the WA market now and within the next four years.

“Certainly the feedback we are hearing from these retailers is that they are seriously looking for two or more sites in some of the higher growth areas we have identified to take advantage of the retail climate over here,” Mr Ireland said.

As at December 2005, Savills Research has identified more than 484,000 square metres of retail development currently planned or under construction, he said, with about 62 per cent of this development in new retail centres.

In relation to the industrial sector, CBRE’s Michael Olsen said opportunities would be scarce, partly due to the lack of industrial zoned land.

“There will be strategic land releases from LandCorp, and there will be a lot of focus on Perth Airport,” he said.

NSC’s Steve Carulli said the industrial sector had always been demand led, and that design and construct would continue reasonably strongly, but that there was unlikely to be any speculative development.

Savills director of industrial sales and leasing, Max Jones, said while sales volumes were low, prime industrial yields had tightened by around 25 basis points during the year. While they now ranged from 8.0 per cent to 8.75 per cent for Perth’s main precincts, astute investors were seriously looking at yields below 8 per cent to secure stock.

“Industrial activity should remain strong as we enter 2006, due to WA’s burgeoning economy. Sales in the $500,000 to $1,500,000 range will continue to be strong over the next three years, on the back of good economic growth supporting smaller business, particularly involved in resources,” Mr Jones said.