Melbourne C
Transcription
Melbourne C
SPRING 2014 www.m3property.com.au Melbourne CBD C Office Market MARKET TRENDS CBD tenant demand positive. New supply to remain below average. Gross face rental growth subdued. Scope for further yield compression due to the weight of investment demand. demand Incentives to remain elevated before gradually declining. The Melbourne CBD office market experienced stronger demand, demand modest levels of new supply and continuing withdrawals in the first half of 2014. Melbourne was only one of two CBD office market to record d a decrease in the vacancy rate over th he period January 2014 to July 2014. Th he Melbourne CBD also recorded the high ghest net absorption p of all capital cities in the e first half of 2014. IN THIS REPORT IN THIS REPORT Market Overview Melbourne s CBD office market conditions have improved in 2014 with Melbourne’s market fundamentals strengthening. The CBD vacancy rate declined in the first half of the year as net absorption increased, new supply ong-term average levels and stock continued to be remained below lo withdrawn. Markett conditions are expected to continue improving into 2015. 1 Key Office Influences 2 Demand & Supply 3 Rental Market 6 Investment Market 7 Outlook 9 Office demand is likelly to improve over the next six to twelve e months. Various forward indicators su uggest continued, improvement in although gradual, employment as the ec conomy rebalances to more diverse drivers of growth. Below average new supply s levels over the next 18 months wiill provide flexibility to the market. Howeve er, a robust level of pre-commitments, tena ant migration into the CBD and continued d stock withdrawals should ensure market fundamentals remain sound. Investment activity remains strong and yields tightened over the last six months due to the weight of money flowing into the Melbourne CBD office market. There is scope for further yield compression in 2015. Gross face rental growth has remained relatively subdued but is expected to strengthen, g , although g not significantly, g y, over the next 12-18 months. Incentives have largely peaked but will remain elevated before gradually beginning to decline in 2015. 628 Bourke Street, Melbourne Sold S ld May M 14 ffor $129 $129.6 6 million illi KEY INDICATORS – MELBOURNE CBD OFFICE MARKET M Stock (m2) Vacancy (%) Gross Face rents ($/m2) Outlook (1year) Gross Incentives (%) Yields (%) Outlook (1year) CBD 4,327,508 8.5% $350-$800 +2.00% 20-30 6.25%-8.00% -15/25 bpts Prime 2,724,873 6.7% $500-$800 +2.00% 25-30 6.25%-7.00% -25 bpts Secondary* 1,602,635 11.6% $350-$500 +2.00% 20-25 7.25%-8.00% -15/25 bpts Source: Property Council of Australia OMR (2014), m3property (October 2014 4). *Secondary is B Grade space only. KEY OFFICE INFLUENC CES ECONOMIC GROWT TH Economic growth is forecast to increase. • The rebalancing of the t Australian economy is underway away from mining and resources to more diverse drivers of growth. The speed at which this transition occurs will be a key driver of Melbourne CBD office demand. • The Victorian Deparrtment of Treasury and Finance (DTF) forecasts moderate, although increasing, economic growth. DTF forecasts that the state’s output will increase from 2.00% (in 2013-14) to 2.50% (2014-15). Output is forecast to increase f th (2.75%) further (2 75%) in i 2015-16 5 16 and d beyond. b d BUSINESS CONFID DENCE AND CONDITIONS • The September 2014 National Australia Bank (NAB) Monthly Business Survey suggests business co onfidence declined in September 2014 to reach the lowest level since the pre-election n period. Business conditions declined again in September 2014 with t tthe e result esu t co consist s stte tentt ac across oss most ost industries. dust es • Various ongoing facto ors have led to the softer result including weaker national income growth (driven by fallling lower commodity prices), ongoing consumer cautiousness and excess capacity. Business confidence remains challenged. g EMPLOYMENT • Forward labour markket indicators suggest unemployment will continue to gradually decline. DTF forecas sts the state’s unemployment rate will decline from 6.25% (in 2014-15) to 6.00% (20 015-16), 5.75% (2016-17) and 5.50% (2017-18). • White collar employm ment is the key driver of office demand and includes a diverse range of industries su uch as Information, Media and & Telecommunications, Finance and Insurance Servic ces, Rental, Hiring Real Estate Services, Professional, Scientific & Technical Servic ces and Administration & Support Services and Public Administration. • Annual growth in the e State’s white collar employment has grown below trend in recent years but ha as improved recently. In particular, Victorian white collar employment growth was w robust in the year to August 2014 increasing by 5.0% (the strongest rate of annual growth since the year ending May 2012). White collar employment growth is s expected to strengthen as economic growth improves. • Employment in Profe essional, Scientific and Technical Services, the largest white collar employment gro oup, has trended sidewards recently. • However, employmen nt in this sector is up over 25% since August 2008 and stronger growth is expected. Unemployment is forecast to gradually decline. Victorian white collar employment growth was stronger in the year to August 2014 and is expected to strengthen as economic growth picks up. Employment (00 00s) 15% 10% 600 5% 400 0% -5% 200 0 Annual Change (%) No (000s) -10% -15% 15% Employment Chang ge (%) Victtoria - White Collar Employment 800 Source: ABS, m3property Research. R www.m3property.com.au Comm3ntary Spring 2014 | P2 SUPPLY, DEMAND AND VACANCY STOCK AND SUPP PLY Melbourne CBD office stock totalled over 4,327,500m2 with the Western precinct accounting for the most space. • urne CBD office market totalled over 4,327,500m2 as at July Stock in the Melbou accounted for over a third of all CBD office space (36%). 2014. The Western precinct p ourne CBD Office Stock by Precinct Melbo as at July 2014 Spencer 5% Nth Eastern 8% Flagstaff 8% Civic 11% Docklands 17% Western 36% Eastern 15% Source: Property Councill of Australia OMR (2014), m3property Research. pp y in the yyear to July y 2014 Net supply was negative. New supply pp y is expected p to total over 196,400m2 in the second half of 2014 and 2015. • Net supply in the year to July 2014 was negative (-21,548m2) driven by withdrawals exceeding total (59,878m di t t l supply l additions dditi (59 878 2 and d 81,426m 81 426 2 respectively). ti l ) Supply S l in i the first half of 2014 was driven by refurbished supply. • oderate supply levels over the next 18 months will provide some Looking forward, mo flexibility to the mark ket. A significant proportion of space currently in the pipeline is pre-committed which h will limit vacancy increases in the short-term. • Recently completed and forthcoming new supply (new construction and partial refurbishment) is ex xpected to total over 196,400m2 in the second half of 2014 and 2015 Around 2015. A d 58,000 58 000 0 2 off new supply 0m l is i expected t d in i 2016 and d beyond. b d • An additional 553,6 600m2 is also mooted including Telstra’s new office at 288 Exhibition Street. • The Victorian Goverrnment recently released an Expression of Interest for the 3.3 hectare Federation Square S East site. The Government is looking to develop the site into a mixed use precinct with office, hotel and retail space. • ade total stock levels will continue to g grow. However,, various Over the next deca factors suggest new annual supply levels will be lower than what has been observed over the previous de ecade. • These include withd drawal of stock for residential conversions and other uses, a generally weaker lea asing environment (to constrain pre-commitments) and waning interest for speculativ ve development. SELECTED MAJO OR MELBOURNE CBD SUPPLY PROJECTS NLA (m2) Development Stage New Development 29,400 Construction 2015 New Development 55,000 Construction 699 Bourke Street 2015 New Development 19,000 Construction 562-574 Bourke Street 2015 Partial Refurb 12,224 Construction Project Address Completion Construction Year Type 313 Spencer Street 2015 559-587 Collins Street Source: Property Council of Australia (PCA) Office Market Report (OMR), m3property Research. www.m3property.com.au Comm3ntary Spring 2014 | P3 SUPPLY, DEMAND AND VACANCY TENANT DEMAND D Net absorption was positive in the six months to July 2014 with over 29,290m2 net absorption recorded. • Tenant demand in the t Melbourne CBD was positive in first half of 2014 with over 29,290m2 net absorp ption recorded. Absorption levels were around long-term average levels (since July 1990) and the strongest half year result since July 2012. • D also recorded the highest net absorption of all capital cities in The Melbourne CBD the first half of 2014. • p stock was stronger in the period reaching over 19,900m2 Net absorption for prime compared to around 9,380m 9 380m2 of secondary stock absorbed. absorbed • This is consistent with the ‘flight to quality’ that has been observed in recent years with tenants taking advantage a of weaker leasing conditions to move to better quality space. • nditions is also resulting in non-CBD tenants migrating to the Weaker leasing con CBD. Demand for prime stock continues to be stronger than secondary space. M Melbourne CBD Annual Net Absorption 250,000 Annual Net Absorption (m2) 200,000 150,000 100,000 50,000 0 -50,000 -100,000 Prime Secondary -150,000 Source: Property Council of Australia OMR (2014), m3property Research . A Grade space has been most in demand in recent years. • Absorption of A Grade space was strongest (net absorption of around 14,330m2 in the six months to Ju uly 2014), followed by C Grade (around 8,740m2) and Premium Grade (around 5,570 0m2). • A Grade space has been most in demand in recent years averaging over 31,700m2 net absorption p per six month p p period since July y 2011. Melbourne CBD Office Net Absorption (6 Mths) Total Premium A Grade B Grade C Grade D Grade Jul-11 54,999 7,280 55,926 1,468 -9,786 111 Jan-12 15,007 -7,796 15,658 6,982 1,833 -1,670 Jul-12 35 533 35,533 -4,540 4 540 43 477 43,477 -4,435 4 435 808 223 Jan-13 682 1,292 10,712 -1,903 -9,942 523 Jul-13 -3,655 8,833 63,729 -62,817 -12,612 -788 Jan-14 4,512 10,103 18,348 -26,885 2,974 -28 Jul-14 29,291 5,577 14,331 742 8,741 -100 Source: Property Council off Australia OMR (2014), m3property Research . Net absorption is forecast to improve in the short-medium term. www.m3property.com.au • Looking forward, nett absorption is expected to improve in the short-medium term as white collar employ yment growth improves. This is consistent with a broader improvement in the labour market and a reduction in the unemployment rate. Comm3ntary Spring 2014 | P4 SUPPLY, DEMAND AND VACANCY VACANCY Melbourne was only one of two CBD office market to record a decrease in the vacancy rate in the first half of 2014. Tenants have been taking advantage of market pricing to move to better quality stock. Market balance will be maintained in the medium term although backfill space entering the market will increase the vacancy rate temporarily. • Melbourne was only y one of two CBD office markets to record a decrease in the vacancy rate (from 8.7% 8 to 8.5% over the period January 2014 to July 2014). • The CBD sub-lease vacancy rate increased slightly in the six months to July 2014 to represent 0.8% of total stock (slightly above the long-term average rate). • Recent movements in the vacancy rate highlight ongoing market trends including tenants taking advan ntage of weaker leasing conditions and market pricing to move to quality stock. stock • s evident in the vacancy rate for B grade stock which reached The latter factor was 13.9% (July 2014), the t highest level since 1999, up from a recent low of 5.7% (July 2012). • e continues to be characterised by lower vacancy rates, for Prime grade space example 7.2% and 6.6% 6 for Premium and A grade space respectively (July 2014). • Market balance and vacancies will be largely maintained in the medium term driven by improving tenant demand, below average levels off new supply, a relatively high rate of pre-commitm ments and continuing stock withdrawals (mostly of B grade space). • kfill space will increase the vacancy rate, albeit temporarily, but The re-entry of back this will be tempered d by the continued migration of tenants into the CBD. Melbo ourne CBD Office Vacancy by Grade Vacanc cy Rate (%) 16% J Jan-13 Jul-13 Jan-14 Jul-14 12% 8% 4% 0% Source: Property Council of Australia OMR (2014) (2014), m3property Research. Research Melbourne CBD Office: Total Vacancy Rate 30% Vacancy Rate (%) 25% L Long-term t average 20% 15% 10% 5% 0% Source: Property Council of o Australia OMR (2014), m3property Research. www.m3property.com.au Comm3ntary Spring 2014 | P5 RENTAL MARKET RENTAL GROWTH H Rental growth continues to remain relatively subdued following recent trends. Traditionally rental growth has been inversely related to the vacancy rate. • Prime and secondary gross face rents in the Melbourne CBD remained relatively subdued over the 12 2 months to September 2014. • Improvement in renta al growth is expected over the next nine to twelve months. • Prime gross face rents are expected to increase by around 2.00% over the year to July 2015 before ren ntal growth strengthens further (3.50% in the year to July 2016). • Melbourne’s rental g growth in the short to medium term should be above the national average with the Syd dney CBD expected to achieve the strongest growth nationally. • Traditionally rental growth g has been inversely related to the vacancy rate. With the overall vacancy rate e expected to remain higher in the next few years (average of 8%+) compared to the last five to ten years (generally below 7%), rental growth will constrained. • On a longer-term ba asis a range of structural changes underway will influence rental growth. • Changes which cou uld negatively impact rental growth include ongoing business caution (in part a legacy of the GFC/post-GFC periods and current low growth environment). • Other changes inclu ude Activity Based Working (ABW), a more subdued inflation environment overall and new (or expanded) office precincts in central Melbourne. • The latter factor will be driven in part by the Victorian Government's plans to make the expanded centra al city Australia Australia’s s largest commercial and residential centre by 2040. • w could positively impact rental growth include the ongoing Structural changes which shift to various ‘know wledge’ sectors and the continued dominance of the CBD as a white-collar employm ment location. • Growth in other secto ors could also positively impact rental growth. • For example, Victorria has continued to entrench its dominance in the overseas education market an nd this could increase demand for workers (and office space) in the sector. Central Queensland University’s lease of 8,000 square metres at 120 Spencer Street is typ pical of this transformation in demand currently underway in the CBD. • on growth – and the associated pipeline of infrastructure Continued populatio investment – should also underpin demand for space from engineering, planning and related firms. INCENTIVES Incentives will remain at elevated levels for the rest of 2014 before gradually declining in 2015 2015. www.m3property.com.au • Gross incentives ha ave trended upwards in recent years due to weaker market conditions resulting in a decline in net effective rents. • e currently averaging around 27.5% and 22.5% for prime and Gross incentives are secondary stock resp pectively. • Melbourne CBD inc centives remain relatively high consistent with broader national trends. • ely peaked and are expected to remain at elevated levels before Incentives have large gradually beginning to t decline in mid to late 2015. Comm3ntary Spring 2014 | P6 INVESTMENT MARKET INVESTMENT MARKET • Sales activity (for sales s over $5 million) remains robust for the Melbourne CBD reaching over $2.6 billon b (September 2014). • The robust result has s already exceeded the high level of sales recorded in 2013. • Unlisted funds and foreign f investors account for the largest portion of sales in the CBD accounting for most sales. • ange of trends will shape the CBD office investment market. Looking forward a ra • First, institutional interest in the Melbourne CBD office market will remain as assets offering both yield and a exposure to resilient and growing economies are sought by these investors. • eases are expected to be below levels observed recently thereby Second, supply incre limiting purchasing opportunities. o • Third, the Melbourne e CBD remains an increasingly popular investment destination for overseas buyers seeking prime stock and exposure to the Australian real estate market more broadly y. • The investment mark ket is evolving as shown by Asian investment now steadily being joined by investmentt from North America and Europe. • Fourth as investors seek yield, but are limited by a lack of prime stock, they are moving up the risk cu urve and increasingly considering secondary assets. • This shift is also being driven by other factors such as continuing low interest rates and d development d l t up pside id (especially ( i ll for f conversion i into i t residential id ti l apartments). t t ) Sales activity remains robust. Looking forward a range of trends will shape the CBD office investment market. Melb bourne CBD office sales volume Sales volume e ($millions) 3,000 2,500 2,000 1,500 ,500 1,000 500 2006 2 2007 2008 2009 2010 2011 2012 2013 2014* Source: m3property Resea arch *Office Sales over $5 millio on to end September 2014. www.m3property.com.au Comm3ntary Spring 2014 | P7 INVESTMENT MARKET Low interest rates,, combined with the weight of money, continues to underpin yield compression. The divergence between rents and yields present a moderate risk to the market. • Prime yields tightene ed by around 25 basis points over the 12 months to September 2014 to now range frrom 6.25% to 7.00%. • Secondary yields ov ver the same period also compressed due to investors being more willing to mo ove up the risk curve and seeking residential development opportunities. • Secondary yields now typically range from 7.25% to 8.00%. • The weight of money flowing into property is a factor affecting both prime and secondary asset yield compression. compression • There is scope for fu urther yield compression over the next six to nine months given the weight of money, continued low interest rates and improving economic growth. • b rents (growing slowly) The divergence between compression) presen nt a moderate risk to the market. • However, improving economic growth, continuing robust investment demand and low lending rates sho ould ensure these risks are minimised. and yields (undergoing Melbou urne CBD prime and secondary yields 14% Yields (%) 12% 10% 8% 6% 4% 2% 0% Prrime Se econdary Source: m3property Re esearch SELECTED MELB BOURNE CBD OFFICE SALES Property address Date Price (millions) Rate $/m2 Market yield Purchaser 459 Little Collins Sep 14 $45.5 $4,577 7.24% Local private investor 700 Bourke St Sep 14 $433.5 $6,765 5.74%^ AMP Capital Wholesale Office Fund CBW (Corner Bourke and d William)* Sep 14 $608.1 $7,470 6.48% GPT (50%) & GPT Wholesale Office Fund (50%) 321 Exhibition St Jul 14 $208.0 $6,866 6.70% Invesco 555 Collins St Jun 14 $78.0 $3,134 VP Fragrance Group 50 Queen St y 14 May $40.7 , $4,404 7.68% European p Syndicate y 628 Bourke St May 14 $129.6 $5,252 7.33% M&G Real Estate Source: m3property Resea arch. *Includes 181 William Street, 550 Bourke Street and Goldsbrough Lane. VP = Vacant Posses ssion. ^Effective Yield – Face = 6.40%. www.m3property.com.au Comm3ntary Spring 2014 | P8 m3property Research For more information please contact: For more information please contact: Research Contacts www.m3property.com.au OUTLOOK Jennifer Williams The outlook for the Melbourne CBD office market is cautiously positive. P 02 8234 8116 M 0400 116 343 Research Contact Unemployme ent Rate (%) 8.0 Unemployment Rate - Australia and d Victoria Aust [email protected] George Bougias P 03 9605 1000 M 0422 266 131 Vic [email protected] 6.0 Key Valuation Contacts Andrew Duguid Key Valuation Contacts P 02 8234 8101 4.0 Gary Longden P 0417 03 0605 M 3431000 772 M 0418 587 835 [email protected] [email protected] 2.0 Don Semken Trent Preece 0.0 2014-15(f) 2016-17(f) 2015-16(f) Source: Commonwealth Treasury, Victorian Department of Treasury an nd Finance, m3property Research. The outlook for the Melbourne CBD office market remains cautiously positive with the market now potentially having turned a corner. New supply levels are expected to stay below average levels in the short to medium term. Moreover a sizeable proportion of new supply Moreover, in the pipeline is pre-committed and office stock continues to be withdrawn. Tenant demand is forecast to remain positive as sentiment and the outlook for economic growth and, importantly, white collar employment growth also improves. Growth Gro th in white hite collar employment emplo ment will ill be underpinned by an improving labour market, the State’s unemployment rate declining and the rebalancing of the Australian economy. Vacancies are expected e to remain contained by the continue ed migration of firms into the CBD, the removval of older secondary space and improving demand. d The entry of some backfill space will w temporarily increase the vacancy rate alth hough not significantly so. Gross face ren ntal growth is expected to strengthen over the next 12-24 months but to remain relativelyy modest overall. Incentives will remain at ele evated levels before gradually declining in 2015 due to improving fundamentals. Sales activity is forecast to remain robust with both local and overseas o investors competing for limited stock.. As a result there is scope for moderate yield compression especially for prime and betterr quality secondary stock. in [email protected] OFFICES 038234 96058102 1000 PP02 M 0400 504 300 trent [email protected] preece@m3property com au M 0433 222 956 [email protected] Definitions A-REIT: ASX listed Australian Real Estate Investment Trust Completion date: determined by issue of a “Certificate of Occupancy” Grade: is determined using the p “A Guide to Office PCA report Building Quality”. Net absorption: is the change in occupied stock within a market over a specified period of time. Net lettable area (NLA): defined in accordance with the PCA “Method of Measurement” Adelaide Brisbane Melbourne Level 3 44 Waymouth Street Adelaide South Australia 5000 T 61 (8) 8212 1755 F 61 (8) 8231 0286 Level 2 15 James Street Fortitude Valley Queensland 4006 T 61 (7) 3620 7900 F 61 (7) 3620 7999 Level 5 114 William Street Melbourne Victoria 3000 T 61 (3) 9605 1000 0 F 61 (3) 9670 1658 8 Perth Sydney Disclaimer Secondary: Combination of grades B, C and D. Unit 2 168 Stirling Highway Nedlands Western Australia 6009 T 61 (8) 6500 3600 F 61 (8) 6500 3698 Level 14 1 Castlereagh Street Sydney New South Wales 2000 T 61 (2) 8234 8100 F 61 (2) 9232 5144 This report has been derrived, in part, from sources other than m3property. 3 t In I passing i on o this thi iinformation, f ti m3property 3 t makes k no representation that any in nformation or assumption contained in this material is accurate or co omplete. WALE: Weighted average lease expiry. To the extent that this ma aterial contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3pro operty makes no representation that any such statements are, or will w be, accurate. Pre commitment: contract Pre-commitment: signed to occupy space in new or refurbished space prior to construction commencing. Prime: Combination of premium and grade A.