INVESTOR outlook is on the up and up, as low interest rates and growing occupier demand spell out an optimistic outlook for real estate in 2021.
According Dexus, it is too early to specify the exact impact COVID will have on the office market and work practices in the long term, as such there is lingering caution being practiced by investors and businesses.
There is still a long way to go before there is a return to pre-pandemic office occupancy levels, despite steadily increasing rates.
Workplace flexibility is likely to hang around, however surveys show that most workers want to work virtually 1-2 days a week but not full time.
A global survey done by PwC and ULI in February revealed that two-thirds of respondents agreed that office tenants will require more space per worker than pre-COVID levels, reinforcing the shift away from high density workplaces.
With white collar employment on the up, projected to grow by 1.8% per annum for the next decade.
Demand over the March quarter was on the up, with even Melbourne seeing an improvement despite a relatively weak net absorption of 56,200sqm. Sydney also had a positive net absorption for the first time in five quarters, with Perth and Brisbane net absorption also increasing.
Premium grade vacancies fell slightly in Sydney, Melbourne and Perth, while total vacancies rose for the quarter.
Total vacancies for the CBDs were at 12.1% for Sydney, 14.3% for Melbourne, 14.0% for Brisbane and 20.2% for Perth. While sublease vacancies in the Sydney CBD fell from 3.3% to 3.2% of total stock.
Face rents were stable in CBD office markets, while effective rents fell due to competitive incentives.
With CBD net effective rent down 18.1% for Sydney, 8.7% for Melbourne, 7.2% for Brisbane and 3.7% for Perth.
In the industrial sector demand has remained strong and above average levels in both Melbourne and Sydney. Over the first quarter there has been $1.5 billion in industrial transactions, with strong demand leading to tighter yields.
With land supply shrinking, limited availability is driving investors out further from inner locations.
Dexus head of research Peter Studley said land values continue to escalate in West Melbourne and Sydney as investors sought to secure key locations in close proximity to infrastructure and motorways.
“The lack of available land in inner locations has driven investors further west in Sydney, following the rezoning of land around Badgerys Creek and further North within the Melbourne market. Land values are likely to climb further given the strong demand outlook.” Studley said.
A recent JLL report predicts e-commerce requires an additional 2.3 million sqm of industrial and logistics space between now and 2025.
And a Cushman & Wakefield report found demand for industrial have doubled since 2019 and shows no signs of slowing.
According to Knight Frank, the acceleration of demand for warehousing facilities during the pandemic will likely see this year’s industrial supply volumes total 2.2 million sqm along Australia’s east coast – 80% of which is to be delivered in Melbourne and Sydney.
In Outer West Sydney, demand levels were strong in the past three months with take-up of 164,000sqm taking the 12 months total to 567,000sqm, well above long-term averages.
In West Melbourne take up levels are off to a very strong start with 307,500sqm in the quarter, continuing the trend of demand running at double the previous average.
In Brisbane, demand for the first quarter of 88,000sqm driven by wholesalers and retailers. The focus has been around the South of Brisbane with Woolworths pre-leasing 10,000sqm in Rochedale and Fantastic Furniture leasing 10,000sqm in Richlands.
In Brisbane, take-up levels have been sitting below long-term averages due to less demand from ecommerce retailers compared to Sydney and Melbourne. In addition the average deal size was smaller than usual for Brisbane, reducing the overall take-up. Incentives have remained steady over the quarter with an uptick in rents within the South.
Meanwhile rent has grown by 1.6% in Outer West Sydney, 1.1% in South Brisbane and 2.2% in South East Melbourne.
While existing prime net face rental growth p.a. has risen for Outer West Sydney by 3.5% and Southern Brisbane 1.1%, with South Sydney falling by 1.3% and East Perth and West Melbourne staying stable.
“Rents grew in most Sydney markets over the quarter, however South Sydney appears to have stagnated, down -1.3%. Incentives appear to have also reduced around the North and South west market whilst remaining steady in the South and Outer west,” Studley said.
Melbourne’s South East and North markets experienced rent growth over the quarter while incentives remain flat. Face rents in the West Melbourne Market appear to have been flat, however a fall in incentives over the quarter could be a sign of rent growth to come.
Average prime capitalisation rate change from quarter four 2020 was down 19bps for Outer West Sydney, 37bps for Southern Brisbane, 19bps for South Sydney and 25bps for West Melbourne, while East Perth recorded no change.
In the retail sector, sales growth has been disparate according to locations and their corresponding lockdowns.
Studley said while smaller supermarket-based neighbourhood centres have been outperforming large regional centres, discretionary spending in the last three months has surpassed non-discretionary spending.
Specialty rent growth in Sydney fell by 4.9% in regional centres, 2.5% in sub-regional and remained stable in neighbourhood centres.
While in Melbourne there was a fall of 7.1% in regional centres, 3.7% in sub-regional and 1.7% in neighbourhood.
South East Queensland saw a 1.3% increase in specialty rent growth for neighbourhood centres, while regional fell by 8.2% and sub-regional fell by 1.9%.
The healthcare sector outclassed all other major property sectors over the past 15 years and of course proved resilient in 2020, with double digit returns at 11.2%. While hospitals recorded total returns of 12.2% and medical centres 11.8%, this compared to all property’s total return of 0.1%.
According to PwC/ULI’s 2021 Emerging Trends Survey, healthcare assets were the most preferred of the main property sectors.