Sydney, 11 September 2013- Strong investor appetite for core office property continues to drive strong transactional activity. However, the factors supporting the yield compression seen to date in the major CBD markets are waning.
CBRE’s Q2, 2013 Australia Office MarketView report found that despite soft occupier markets, investors have not been deterred, with over $2.8 billion in major transactions in Q2 across the country.
These major office deals include Bankwest Place & Raine Square in Perth to Charter Hall for $458 million, 480 Queen Street in Melbourne to DEXUS for $543.9 million and the QLD State Government Portfolio to QIC for $561.9 million.
Claire Cupitt, Senior Research Manager, Global Research and Consulting said that across the major office markets a number of opposing forces were at play.
“Some of the factors that have helped push yields lower over the last 12 months are fading and those opposing factors that have promoted higher yields are weighing more heavily,” said Ms Cupitt.
“Australia’s interest rate differential with the rest of the world is closing, prompting a decline in the AUD and great volatility. Growth is also slowing more rapidly; incentives are increasing and the rental growth outlook is very weak.”
According to Ms Cupitt the soft outlook for office income will be factored into investment decisions where tighter cap rates in the short term will be offset by weaker incomes, limiting further compression.
“We forecast a further tightening in prime cap rates in both the Sydney and Melbourne CBD’s over the remainder of the year. However through 2014 and 2015, we expect the balance of this tightening will unwind as the full impact of a weaker economy is felt. This should see average Australian CBD prime office yields move closer to their long run average.”
While investors remain focused on the acquisition of ‘core’ office assets, tenant demand remains soft in most of the major markets.
With no distinct drivers of activity in the non-mining sector, CBRE expects things to worsen before they improve. Challenging business conditions and a weak labour market have constrained demand and led to historically low national new absorption.
A number of CBD tenants across the country are either consolidating operations or contracting operations and therefore space requirements. In Sydney, Melbourne, Brisbane and Perth (to a lesser extent), there has been a sharp rise in sublease availability and incentives – in some cases to historic highs. For example, space consolidation and contraction accounts for approximately 80% of sublease availability in the Sydney CBD.
Highly correlated with movements in sublease availability are incentives. In line with the shift in sublease availability, incentives are moving north in most markets.
“In the Sydney CBD, incentives are moving into the 30% range and we expect deals to be done at 32% by the end of the year,” said Ms Cupitt.
“In the Melbourne CBD, incentives are around 30% - their highest level in 16 years. While averaging 26% in June, we forecast incentives in Brisbane to move above 30% by year end. In Perth, albeit to a lesser extent, we expect incentives to continue their upward momentum, reaching 14% by the end of the year. Interestingly, after averaging 15% for close to a decade, incentives in the Adelaide CBD rose to 20%.”
Sublease Vacancy and Incentives
Given the weakness in demand fundamentals across office markets nationally, CBRE’s outlook for net absorption is below long term averages.
“Over the next decade we forecast national CBD net absorption to be on average 15% lower than over the last decade. We expect further declines in the contribution from the mining sector and continued space consolidation strategies in the public sector. Our outlook for base office demand contribution by industry over the next decade looks more like the 90’s - with a higher contribution from business services on the back of medium to long term improvement in population growth and economic performance.”
Forecast Net Absorption and GPD growth – at June 2013
