Let the Games Begin: The Gold Coast Arrives

In 2012, the Gold Coast slipped past Newcastle to become Australia’s sixth largest city.

Long seen as just a strip of hotels and waterfront estates with little in the way of ‘real industry’, this vibrant city is growing fast and developing diversity in its economic base. 

The region is on the threshold of reaching a point of critical mass, and recent developments should act as a catalyst for more growth.

Triggers for growth

Winning the 2018 Commonwealth Games was obviously a decisive moment, with the Queensland government predicting up to $2 billion in economic benefits and an additional 30,000 jobs for the region.

An event of this size should prove a major boost for tourism, which has been caught in a trap between the GFC dragging down international arrivals and a high dollar encouraging Aussies to travel overseas. That looks to be turning around, with Tourism Australia announcing international arrivals jumped 8.2 percent in 2014.

The second trigger addresses a longstanding drawback in this market, namely the lack of a CBD, with commercial activity spread across Robina/Varsity Lakes, Broadbeach, Bundall, Surfers Paradise and Southport.

Robina, with 134,000sq m of office space and a vacancy of 9.8 percent, has experienced the fastest growth rate in recent years. But it is Southport that still leads, hosting government agencies like the courts and police, and home to 150,000sq m of office space at a vacancy of 15.2 percent.

A recognised CBD can prove critical to economic development, which explains why the state government decided to award Southport ‘PDA status’, opening the way for new infrastructure and development support.

Market fundamentals 

A new CBD and a major event are major boosts for any city, but it is sustainable economic growth and market fundamentals that are most important in the long run.

So what are the fundamentals driving this market? 

At first glance, office vacancies look high at 14-15 percent, but all is not as it appears. For one thing, vacancy was 24.1 percent four years ago following a decade-long development drive. But with little new stock, net absorption has been on the rise, reaching 21,140sq m in the year to July 2014.

At Savills, we estimate demand for administrative space in a CBD as a ratio of population.  For example, in the Brisbane CBD, demand for office space has been generated at the rate of 0.413 to 0.425sq m per state capita over a period of 20 years. Each capital city in Australia varies on the ratio per capita depending upon the level of decentralisation.

Provincial regions, however, have a more direct relationship. The Gold Coast region population has been generating demand for office space on the Gold Coast at the rate from 0.517 to 0.667sq m with the higher level, more recently as the area matures.

This suggests that with the population growing between 3 percent and the long term average of 6 percent, demand for office space will vary between 12,000sq m and 24,000sq m annually. The average space taken over the past 10 years has been around 10,500sq m annually.

The identification of Southport as the CBD for the Gold Coast may well lift the ratio further but will certainly attract a greater share of the region’s office demand to Southport.

Infrastructure

Winning the Games saw the state government commit $500 million to new infrastructure, and there are other major initiatives in the works. One such initiative is a light rail service, which will run from Southport to Robina, where there is already an express rail service to Brisbane.

When you add to this equation, a major airport at Coolangatta and the motorway to Brisbane, the Gold Coast is better serviced than other regional centres.

But most important is the hospital in Southport. The major medical facility acts as an incentive for retirees and families when considering where they will relocate in Queensland.

Diversification

As we have seen, the office sector is likely to do well. But what about other sectors?

Retail and accommodation are the most obvious beneficiaries from rising tourist numbers, with bulky goods properties benefiting from the continuing rise in population. 

What is often not well understood is that light manufacturing and the high-tech sector have been the fastest-growing generators of tenant demand, particularly around Robina. Much of this growth comes from mid-sized employers who are attracted by the 20 percent average discount on rents compared to Brisbane.

Boom and bust

The most persistent factor in investor sentiment towards the Gold Coast is its reputation for booms followed by a bust. There is some truth to this sentiment, but the pattern has been mitigating over recent years.

Take a look at this graph of commercial vacancies. What you can see is that the peak that followed rapid development in the early 1990s was followed by a continued downward trend for the next 14 years. The recent peak in 2010-11 was a full 10 percentage points below that mark and is now heading downwards in the same manner. 

That suggests to me we are approaching a point where the Gold Coast’s supply and demand equation will be more consistent with those of other major Australian cities.

What Savills sees on the Gold Coast is a widening commercial and industrial base, improving infrastructure and continuing population growth intersecting with improved business confidence and a rising investor appetite for quality commercial assets. 

As with all markets, investors need to be judicious in their stock selection, but there are good opportunities for investors on the Gold Coast.