Brisbane, 29 October 2014 – A relatively weak occupier market and expectations of further vacancy increase will be among the short term challenges for the Brisbane office market.
However, 2016 is forecast to be the ‘hump’ year for Brisbane as export-led growth and continued strength in the housing and consumer sector underpin a recovery in the state’s economy.
That was the view from today’s CBRE Brisbane Market Outlook breakfast, which is staged in Sydney each year to outline the market’s performance and prospects to key institutional investors.
At a macro level, CBRE’s Head of Research, Australia, Stephen McNabb said the mix of growth was shifting in Queensland as mining investment tapered, with exports growth to be one of the key future drivers leading the state out of last year’s trough.
Offsets to mining investment in Queensland are expected to include the LNG industry, with the state expected to be responsible for some 20-25% of Australia’s total LNG output by 2016.
Mr McNabb also noted that Queensland’s economy was significantly more diversified than Western Australia, with just a 10% reliance on mining output, as opposed to 33% for WA.
At a property level, the expectation is that the overall Brisbane CBD vacancy rate will peak at 18-19% in 2016, with the current mismatch in supply and demand expected to keep continued pressure on effective rentals.
Mr McNabb said the view was that the “worst had passed” in the Brisbane occupier market, following an estimated 35% reversion in rents from the 2008 peak.
However, he noted that; “Relative pricing for Brisbane is now starting to be more reflective of the local risks relative to Sydney and Melbourne”.
CBRE Senior Director, Capital Markets, Bill Tucker told attendees at today’s breakfast that there was a continued divergence between Brisbane’s prime and secondary markets, with the prime vacancy rate currently sitting at 10-11% versus 18% vacancy in the secondary market.
While the prime vacancy is expected to rise further, to between 16 and 17% as new construction comes on line, Mr Tucker said prime was expected to continue to outperform secondary stock, with Brisbane set to experience a ‘top down’ recovery.
On the investment front, CBRE Director, Capital Markets, Flint Davidson said the environment in Brisbane remained positive despite the challenges in the occupier market.
While conditions were expected to normalise after last year’s record, when over $3 billion in Brisbane office property changed hands, Mr Davidson said activity was still strong, with a further $350-$400 million in transactions expected by the end of 2014.
Long Weighted Average Lease Expiries and attractive yields have kept Brisbane on the investment radar, with an up to 100 basis point spread between Brisbane and the Sydney and Melbourne markets.
However, Mr Davidson noted that the investor focus in Brisbane was expected to shift going forward.
While much of the recent activity has involved development stock, Mr Davidson said the availability of this style of asset had lessened considerably.
“We also haven’t seen any forced sales in Brisbane but we do see that coming, with valuations under pressure in the secondary market. It’s quite likely we’ll see some pressure brought to bear – it might be in six month, it might be in 12 to 18 months, but we certainly see it on the horizon,” Mr Davidson said.
CBRE Senior Managing Director for Queensland, Bruce Baker, added that the Brisbane market was currently being targeted by a wave of “second tier” capital, involving first time Australian buyers from Hong Kong, Singapore and China.
“While we expect that next year could be challenging for some assets from a pricing and valuation perspective, we also expect that the market could surprise on the upside,” Mr Baker said.
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