Tenants, buyers win in sluggish CBD

Rising vacancies and falling rents in Perth’s CBD office market are putting tenants in prime position to score favourable deals, while the conditions could also result in potential bargains for institutional investors.

Office leasing experts are expecting the vacancy rate to increase to around 14 per cent over the next 18 to 24 months, leading to further reductions in prime CBD rents.

Prominent office projects needing tenants include Brookfield Properties’ second tower at Brookfield Place, Qube Property Group’s 999 Hay Street, DMG Australia’s 1006 Hay Street, as well as potential developments from Primewest and Georgiou Capital.

CBRE senior director Andrew Denny said owners of new buildings should have no issues finding tenants, but landlords of older buildings may want to consider renovating and repositioning their assets as residential or hotel accommodation.

“There are some good deals around, but the part of the market where there will be issues is the lower-grade stock,” Mr Denny told Business News.

“Tenants want high-quality buildings with better lifts, air-conditioning, good floorplates, good amenity and end of trip facilities.”

Mr Denny said he expected conditions in the Perth market to improve once the vacancy rate peaked at 13.8 per cent in 2016, tipping increased demand from the oil and gas and professional services sectors.

“WA has the highest population growth in the nation and highest percentage of white collar employment, and that translates to more demand for office space,” he said.

“The elephant in the room is Perth’s resources sector. I would never write it off, and if things turn around there, the vacancy rate and rent situation will change very quickly.”

On the sales side of the ledger, on-market transactions are likely to be few on the ground in 2014, with experts expecting write-downs in value to become commonplace.

The off-market sale of 130 Stirling Street to Singaporean investment group Hiap Hoe last week, however, will provide a much-needed boost of confidence, according to Savills WA city sales director Miles Rowe.

“We think there may only be limited transactions this year, as the market works through some readjustments in vacancy and incentive levels,” Mr Rowe told Business News.

Colliers International director of investment services Ian Mickle said most buyers interested in Perth offices were based offshore, evidenced by recent sales in the market, including 130 Stirling Street.

“We expect this level of interest in Perth property from overseas buyers to continue,” Mr Mickle said.

“The desire to do deals is there and activity from this market is likely to remain strong – but it’s unlikely we will see a lot of on-market assets offered for sale in 2014.”

Assets currently on the market include 220 St Georges Terrace, the sale of which is being coordinated by Knight Frank, and Aspen Group's Septimus Roe Tower on Adelaide Terrace, which has been on the market since last year.

Aspen last week wrote down the value of the Septimus Roe tower by $12 million, following an independent valuation.

“A lot of properties are going to be written down in value because of the fall in rental values and the increasing vacancy rate,” Knight Frank national director of office leasing Greg McAlpine said.

He said the reduced values were a direct knock-on effect from the slowdown in the mining services sector last year.