Office outlook hinges on lockdown duration

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DEXUS expects the current lockdowns to slow down business confidence and the economic recovery, as occupier demand for real estate improves across most sectors and markets.

In its latest Australian Real Estate Quarterly Review, Dexus researchers Peter Studley, Shrabastee Mallik and Matthew Persson said business confidence would bounce back later in the year.

“Lead indicators have been strong with business confidence and advertised jobs for professionals both running at high levels. The current NSW and Victorian lockdowns are expected to reduce confidence and leasing activity but not derail the recovery,” they said.

Prime Minister Scott Morrison yesterday warned the lockdowns would have a “significant impact” and create a “heavy burden” on Australia’s GDP in the September quarter, and have a near-term impact on employment.

Dexus said that while face rents held steady, effective rents in CBD office markets fell further in the June quarter due to rising incentives. High vacancies are likely to keep rent growth subdued in the short term.

“While the current lockdowns have injected an element of uncertainty into the outlook for FY22, there are reasons to be positive about the prospects for real estate.

“Much depends on their duration. The year ahead is still expected to be a year of improving occupier demand for real estate in most sectors and markets.”

“In addition, investment demand for quality real estate is likely to remain supported by low interest rates.” Studley said.

Dexus – Australia’s largest office landlord – this week struck an agreement to fund, develop and invest in Atlassian’s $1.4 billion 40-level, 75,000 sqm hybrid timber tower in Sydney’s future Tech Central hub. Along with Frasers Property Australia, it recently lodged plans for 130,000 sqm of workspace across two towers at neighbouring Central Place.

In May, Dexus lodged plans to add nearly 16,000 sqm of space to its 60 Collins Street development in Melbourne.

Property values are expected to benefit from a climate of improving occupier demand at a time of low interest rates is expected to be good for property values.

Short-term interest rates will remain low throughout the 2022 financial year, however markets will begin to price in modest interest rate rises on a two to three-year timeframe,.

“Growth prospects in the industrial and healthcare sectors are better than for office and retail, where vacancy will take time to absorb.”

Yield spreads over 10 year bonds have narrowed for industrial, but remain wide for other sectors.

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