Historically, the Canberra office market has been characterised as having one of the strongest supply pipelines nationally.
Historically, the Canberra office market has been characterised as having one of the strongest supply pipelines nationally.
Over 2015/2016, developers were largely reluctant to build speculatively, following weaker economic conditions and moderating leasing demand driven by cost cutting measures initiated by Commonwealth tenants. Following two years of negative net supply, 2017 saw new additions amounting to 51,364 square metres. Improving market conditions and a strengthening economy are providing the impetus for an increase in developments.
According to the latest research report from Savills Australia, the commencement of two new speculative developments in the CBD will add approximately 35,000 square metres of new accommodation in the 2019/20 period. A further 20,000 square metres of space in the CBD and 15,000 square metres in Dickson have been pre-committed by the ACT Government and are due to be completed over the same period. Anecdotal evidence from current leasing campaigns on these developments suggest a significant upward revision of rents.
In the 12 months to December 2017, Savills Research identified approximately $571.7 million worth of office transactions (greater than $5 million) in the Canberra office market.
According to Andrew Stewart, Managing Director of Savills ACT, this level of activity is well beyond the 10 year average of $416 million and can be traced to a single transaction; the sale of 50 Marcus Clarke Street, City.
“The asset was sold for $321 million to South Korean asset management firm, Mirae Asset Global Investments at an equated yield of 5.75% by Malaysian vendor CIMB Trust & Malaysian Employees Provident Fund. It is important to note that traditionally, these larger assets are tightly held with only four trading in the past five years.
“Demand for Canberra assets are being driven by domestic and foreign investors focused on secure income streams and long Weighted Average Lease Expiry’s (WALEs) owing to the majority of office space being leased by Government tenants.”
Mr Stewart went on to say that large funds and trusts that rely on both income growth as well as capital growth are certainly attracted to the Canberra market.
“We are also seeing a trend towards more privatisation which has led to a greater diversity in tenant base as more consulting firms relocate to Canberra for jobs that are being outsourced by the Federal government off the back of cost cutting measures implemented by the Liberal government.”
There was a notable increase in local institutional funds and private investors purchasing office assets in Canberra. One noteworthy transaction was the sale of 44 Sydney, Forrest in November 2017 for $64.70 million on an equivalent yield of 6.24%, purchased by Australian based fund manager Charter Hall.
Anecdotal evidence is suggestive of increasing demand for new or new-near buildings with long-WALE’s, with current owners of such properties reluctant to divest themselves of their properties.
According to Shrabastee Mallik, Senior Analyst - Capital Strategy at Savills Australia, market yields in Canberra Civic, as at December 2017, are estimated to range between 5.50% and 7.25% for A Grade, and between 7.50% and 10.50% for B Grade buildings.
“The average yield for A Grade office buildings in the quarter to December 2017 is 6.40%, representing a 35 basis point firming over the year.
“Capital values in the Civic precinct in Canberra, as at December 2017, are estimated to range from $5,265 per square metre to $8,350 per square metre for A Grade buildings, and between $3,500 per square metre and $5,400 per square metre for B Grade buildings,” she said.
Ms Mallik believes that fewer projected public service job cuts and a more relaxed budget looks likely to lead to a resurgence in office leasing demand and an increase in developments.
“Rents for new and near-new A Grade stock have been maintained at a stable level, with a small level of face rent growth at the top end of the market,” she said.
According to Pip Doogan, Director of Office Leasing at Savills ACT said the level of incentives on offer for this class of property have stabilised, and are trending down gradually in those areas with low vacancy rates, which should result in a rise in effective gross rents in this market sector.
“Gross rents for lower grade stock are forecast to continue to be under pressure during 2018, with continued pressure on the level of incentives required to secure tenants for this class of property.
“Net face rents in the Canberra Civic precinct range from $340 to $400 per square metre per annum for A Grade and from $290 to $325 per square metre per annum for B Grade, as of Dec 2017.”
OUTLOOK
The Canberra office market has over the past few years delivered high levels of stock, against a background of strong net absorption. However, as a result of falling leasing demand from the Commonwealth leading up to, and following from, the election of the Coalition to Government in 2013, the speculative development phase that had been experienced in Canberra ended in 2015-2016.
Most recently however, as a result of falling vacancy rates, signs are emerging of conditions which will support speculative development at the top end of the A Grade market in the two premiere office markets in Canberra (CBD and Barton/ Forrest).
Ms Doogan said “With the current Federal Budget appearing to provide only limited cuts to the Public Service beyond those provided for in previous budgets, the office leasing market appears to be at, or near, the bottom of the current cycle."
Savills Research anticipate the gradual tightening in vacancy to continue until a surge in new supply in 2019/2020 helps to alleviate pressure, particularly in the prime market. Modest growth in effective rents is a likely consequence, although confined to Civic and Barton, where acute vacancy rates and strong demand maintain downward pressure on incentives.
Mr Stewart said the steady risk-adjusted returns available in Canberra are expected to continue to attract both local and offshore investors, particularly pension funds. Looking further up the risk/return curve, we expect value-add strategies will remain popular with private investors.”