INVESTMENT activity is gaining momentum in Perth’s CBD office market, as the city’s strong fundamentals and ongoing demand for premium space promotes confidence in investors.
Despite being stilted for most of 2020, Knight Frank’s latest report, The Perth CBD Office Market Report March 2021, revealed a turnaround in the fourth quarter.
“Investment picked up in late 2020, with 65% of deals by volume occurring in the December quarter, reflecting growing confidence in the outlook for the Perth CBD,” said Nick Charlton, director and head of institutional sales at Knight Frank.
Investment volumes returned to the 10-year average in the fourth quarter, while the total volumes for 2020 were at the lowest levels recorded in a decade, down 75% on the previous year’s figures.
“Transaction activity received a further boost in February, with GIC reaching an agreement to purchase a 25% stake in One The Esplanade from Brookfield for $220 million, the first major transaction of 2021.”
“This positive momentum has continued with the settlement of 16 Victoria Avenue and AMP taking 140 St Georges Terrace to market with further large scale assets set to come to market later this year,” added Charlton.
Over the last six months’ prime yields have remained stable across Perth’s office market, though are 12.5 basis points lower than the same period in the previous year, at 6.4%.
According to the report, both buyer and tenant confidence is rebounding in the market, as economic growth remains strong.
“Growth in the state’s economy moderated in the December quarter to 1.5% following a strong rebound in the September quarter at 5.5%, but moving forward Western Australia is set to continue to perform relatively strongly,” said Chris Naughtin, author of the report and director of research and consulting at Knight Frank.
Household consumption, as in much of the country, has kept the Western Australian economy in good stead throughout a turbulent 2020, with retail sales climbing by 18.4%. WA significantly overshadowed the 10.6% growth rate for the Australia’s total.
“Federal and state government incentives for housing construction have also supported growth, underpinning a sharp increase in dwelling investment, as well as higher export volumes and a strong rally in iron ore prices,” said Naughtin.
Leasing activity is yet to pick up, though enquiry volumes have been improving and will likely continue to do so as the economy fully reopens and oil and gas prices recover.
“The turnaround in prices may lead some energy companies to proceed with LNG projects that had previously been shelved, which could in turn have potential positive flow-on effects to engineering-related office employment in the Perth CBD,” said Ian Edwards, partner and joint head of office leasing at Knight Frank.
Average prime incentives increased by 8.3%, currently ranging from 46% to 50%. While in the in the three months to October, average prime incentives were up 4.2% to 48.3%.
Prime net effective rents rose by 0.3% to $319 per sqm, in the three months to January. While net effective rents fell by 14.1% over 2020.
Prime net face rents remained stable with a 0.3% increase to $617 per sqm in the three months to January, with face rents falling by 0.3% in the year to January, down from the 4.7% growth rate recorded in the previous year.
Deals have been largely concentrated in the 500sqm or less market, with 1000sqm and over spaces still suffering as a result of tenants rethinking their overall footprint needs, as COVID-19 has made seemingly long term impacts on office space requirements. With many workers preferring to continue to work from home.
“However, there is an increasing divergence in demand among the segments and individual assets, with corporates chasing premium stock in the CBD and stronger demand for space in CBD fringe and suburban areas. By contrast, demand for lower A-grade and secondary stock in the CBD remains limited,” said Edwards.
The overall vacancy rate climbed from 18.4% in July of 2020, to 20.0% in January of this year, reflecting growing vacancy rates in the A-grade segment.
Vacancy rates for premium grade stock a has sat unchanged at 6.8%, while a grade stock has seen a 4.7% increase in vacancies to 20.5%, this is likely to continue to rise to around 22% in 2021, as net absorption remains subdued.
Sublease vacancy increased to 1.5% of CBD office stock in January of 2021, compared to 0.9% in July of the previous year, with A-grade stock accounting for 52% and premium stock a further 24% of the increase in supply.
Net absorption fell by 32,991sqm in the six months to January, due largely to a 29,666sqm drop in the A-grade segment, while premium grade increased marginally and the secondary market also fell.
“However, a pickup in office demand as employment growth strengthens and people return to offices is likely to drive a gradual but steady decline in the vacancy rate from 2022 onwards, with the supply pipeline also fairly limited,” concluded Naughtin.