Early prospects emerge in Perth’s office market

While Australia’s economic growth is expected to remain subdued in 2020, a number of positive indicators are hinting at stronger prospects for WA’s economy, which are poised to also benefit WA’s recovering office sector. Mair Property Funds has been monitoring the office sector for some time and has increased activity in this market. Our focus has been on identifying the right timing and value-add opportunities to take advantage of counter-cyclical movements and deliver long-term benefits for investors.

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Macro-economic indicators show positive long-term outlook for Perth

On a broad stage, Australia’s growth (GDP) is expected to be less than the global average for 2019 and 2020, with the Reserve Bank of Australia (RBA) predicting a rate of 2.75% according to reports from Knight Frank Research. This is contributing to the overall consensus that further cash rate cuts are likely on the cards in 2020, with economists predicting rates to drop as low as 0.25% throughout the year in an effort to stimulate growth.

However, at a local level, strong macro-economic indicators are driving a more positive outlook for the Western Australian economy, with a recovering minerals and resources sector expected to support an uplift in job and wage growth in the medium to longer term. This is being coupled with an improvement in population growth, which is returning to healthier levels off the back of a slowdown in interstate migration. According to Knight Frank Research, Perth is forecast to see 11.42% growth in employment in the five years from 2019 to 2023 – a significant improvement on the 1.22% recorded from 2014 to 2018. This is second only to Melbourne, which is forecast to see 12.63% growth over the same period. It is anticipated that the majority of this employment growth will be in the professional, technical and specialist sectors, which will in itself have positive ramifications on demand within Perth’s office market.

Positive tenant demand expected to drive vacancies down

While Perth has been (and remains) the CBD market with the highest vacancy rate, an uplift in tenant demand and movement has already translated into early signs of improvement.

The latest report from the Property Council of Australia showed that Perth recorded its sixth consecutive period of positive tenant demand in the six months to January 2020, with tenants taking up 32,738 sqm of office space – more than absorbing the 23,718 sqm of new supply. With only 19,566 sqm of additional space expected to be added in 2020 (and no more projected until 2023), vacancy rates are expected to continue trending downwards towards more normal levels of circa 10%, driven in particular by progressive landlords willing to make changes to meet new market (tenant) expectations.

Of all the major office markets in the Asia Pacific region, CBRE forecasts Perth to see the most growth in effective rents (face rents less incentives) throughout 2020, projecting 15% growth. Initially, this may be driven by a reduction in incentives rather than a rise in face rents, with benefits then expected to flow through to active Landlords.

Disparity across different grades

The headline rates are not the same for all office sectors and buildings. While Perth’s overall CBD vacancy rate was recorded at 17.6% at the start of 2020, figures from JLL research show it is a different story amongst the various grades.  Prime grade vacancy (prime being Premium and A grade stock, according to the PCA) was recorded at 13.5% for the same period, while secondary grade (B grade and below) increased to 27.8%. Premium grade vacancy was even lower at 7.0%, which is the lowest level reported since Q3 of 2017. This disparity is largely being driven by a “flight to quality”, whereby tenants are taking advantage of the market conditions to secure quality space in central locations with cyclically low rents and large incentives, making relocation hard to resist.

However, as the top end of the market tightens, tenants will consider other opportunities in the A and B grades, with building amenities, location and access expected to be critical in securing the best tenants in a competitive market. Indeed, recent results already show the benefits for commercial landlords who have been willing to reposition and upgrade assets to capture tenant interest.

Opportunities for counter-cyclical investment

It is now widely commentated that the Perth office market is in the lower segment of the demand cycle. As a result, MPF sees 2020 as an excellent opportunity for counter-cyclical investment as part of value-add strategies. It is our intention to target well-located office assets in Perth and West Perth, potentially with vacancy and in need of refurbishment, providing the opportunity for rental upside and growth in value. This will allow us to build on our team’s experience and track record in value-add projects, refurbishments and outright developments. Supported by our network, knowledge and research, refurbishments will be reflective of emerging trends and demands from the leading occupiers to provide better, smarter buildings that deliver an environment for occupiers to thrive and improve productivity. Our goal being to future-proof the assets and provide resilience, adding value for investors and occupiers alike.

To stay abreast of future investment opportunities with Mair Property Funds, visit the MPF website, or contact our Key Relationships Manager Brad Dunn at bdunn@mair.com.au

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