Finance and Insurance Leasing at Five-Year Peak

25 October 2017

Office leasing figures for the Melbourne CBD (size above 500 square metres), show a total of 400,053 square metres was leased in the 12 months to September 2017, a rise of circa 31% over the five-year average with the Finance and Insurance services sector absorbing 76,631 square metres of the space, 87% of which was prime grade, according to the latest Savills research.

According to Monica Mondkar, Savills Associate Director of Research “Take-up by the Financial services sector was quite remarkable, the highest in five years and up by 110% over the past 12 months”.

“Another major triumph for the sector was securing a position amongst the top three occupier categories in the CBD after a five year period. Demand from the Financial and Insurance sector has finally turned a corner, which has previously been contracting since September 2010”, said Ms Mondkar.

Australian Bureau of Statistics counted financial services at 9% of GDP, the largest share by industry type in the national context, which is also a historical high for the sector. Financial services’ GDP contribution has even surpassed Housing and the Construction industry and now really is the leading economic driver, creating a lot of wealth, a lot of growth and a lot of jobs”, added Ms Mondkar.

“Lending services and insurance firms, benefitting from Victoria’s population and construction boom, have been key drivers for the office take-up by the financial services industry. Also, there is pent-up demand from financial planners upgrading or expanding their footprint into the CBD, profiting from a rise in the number of investors favouring alternative investments over the risk-free government bonds (amid a low-interest rate environment)” she continued.

Savills Director of Office Leasing Phillip Cullity, said “There were a number of factors behind the massive surge in financial sector leasing, including jobs and population growth in Victoria, lease expiries, staff retention and recruitment, and efficiency gains.

“The Financial Services sector, in particular, has been proactive in taking advantage of market conditions, locking in rents and incentives before rents begin to rise considerably.

“Tenants now realise that, as they are in competition for the best young talent, they must offer modern accommodation that includes the latest building and technology services, meeting and fitness facilities, access to transport, childcare and cafes,’’ Mr Cullity said.

He went on to say that occupiers were also increasingly mindful of the need for more efficient buildings in reducing costs, a key motive for relocation to higher grade properties.

One-in-five enquiries for office space in the Melbourne CBD in the first nine months of 2017 had come from insurers and financial services providers, added Mr Cullity.

Other major financial services moves on the horizon include NAB’s 66,000 square metres pre-commitment to 405 Bourke Street and Vanguard Investments considering 10,000 square metres at Cbus’ Collins Arch project.

The overall reported CBD leasing activity was marginally up on the 394,997 square metres leased in the 12 months prior. Supply constraints have been having an impact on the market. To put this in perspective, Melbourne CBD’s vacancy rate declined to 6.5% at July 2017 from 7.1% a year ago.

66% of the total leased space was Prime grade. Direct leases measured 219,874 square metres, while 148,942 square metres was pre-committed space. Growth in pre-committed space was at record high levels, up 350% from 12 months prior.

The make-up of Melbourne CBD’s occupiers is diverse with the Government & Community sector continuing its domination at 39%, followed by Property & Business Services at 32% and Financial & Insurance ranking the third largest sector by leasing 19%.
Mr Cullity said, “We can expect a number of significant leases to be concluded prior to the Christmas holiday period resulting from a strong pipeline of occupier requirements in the market. Savills tenant enquiry analysis revealed current tenant enquiries (above 500 square metres) measure about 250,000 square metres, all to be leased between the remainder of 2017 and 2018 in the CBD.

Ms Mondkar said “Last year Melbourne CBD’s net absorption was 128,000 square metres which smashed the 10-year average at 76,000 square metres, and all indications are suggesting that we are in for another strong year. With vacancy levels forecasted to fall further, outlook over the next 12–18 months is expected to be very positive”.

NAB’s monthly Business Conditions Index was at 14 points in September 2017 – almost three times the long-run average (+5). Victoria’s economy continues its drive with the strongest population growth in the nation and a major focus on jobs growth.

Latest ABS figures reveal that the largest year on year increases in employment were recorded in Victoria (up 96,791 persons) in August 2017. “What is notable about the Victorian economy is that growth in full-time jobs has been material over the last year indicating stronger employment metrics for Victoria”, according to Ms Mondkar.

Growth in professional job advertisements in VIC (4.37%) remained considerably higher than the 2.14% national average. Professional job ads have been consistently positive in Victoria over the last three years with job advertisements in August 2017 at their highest level since May 2012. This is clearly reflected in positive net absorption numbers in Melbourne CBD. With growth in professional job ads still strong in the current quarter, it would be prudent to expect this to translate to continued CBD net absorption performance over the 2017-18 period”, said Ms Mondkar.

Click here to view relevant charts from the report.

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Key Contacts

Phillip Cullity

Phillip Cullity

Director
Office Leasing

Melbourne (VIC Head Office)

+61 (0) 3 8686 8002