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News release

Investor confidence on the rise after $420 million first half sales

Tight market, high absorption and limited supply pipeline to fuel forecast increases over next two years


PERTH, 24 August 2011 – Investor confidence in the on-going growth of the Perth office market is on the rise following the sale of $420 million worth of high quality CBD office assets in the first six months of 2011.
 
According to Jones Lang LaSalle Perth Research Analyst Hugh Peacock, the implication of the sales, ranging from $31 million for 182 St Georges Terrace acquired by Standard Life, to $130 million for Stockland’s half share in the Bankwest tower, extends well beyond the fact that they were the first major asset transactions in the city since January 2010.
 
“These seven sales also followed a year of record net absorption in 2010 in which 103,600sqm of space, almost five times Perth’s 40 year annual average, was taken up by companies driven by WA’s resources sector expansion,” he said.
 
“Furthermore, at 5.4 per cent overall and 2.9 per cent for prime space, Perth now has the lowest CBD vacancy rates in Australia.”
 
Commenting on the findings, Jones Lang LaSalle WA Managing Director John Williams said the sales were a clear indication of a decisive shift in the market’s value perspective and thus anticipation of rental and capital growth.
 
“As we predicted earlier this year, there would be a significant influx of funds from investors into Australia and in particular WA. This is now coming to fruition with companies such as Standard Life, Brookfield and the Motor Accident Commission either moving in or increasing their exposure in the Perth market.”
 
Mr Williams explained that during 2010 vendors adopted a holding position in the belief that rentals and capital values were in a growth phase. In contrast to this, buyers, although looking to build their portfolios, were still to be convinced about the prospects for sustained economic growth.
 
“However, over the ensuing 12 months investors came to the increasing conclusion that rents had bottomed and that there was sufficient confidence in the business sector’s growth prospects.”
 
Mr Williams said a key factor in the market’s turnabout was the recognition that demand for accommodation was likely to outstrip supply over the medium term.
 
“All of the new supply of office accommodation due for completion in 2011 is pre-committed. Of the potential 120,000sqm of back fill space left when tenants such as BHP Billiton, Bankwest and the State Government  relocate to the new buildings Jones Lang LaSalle’s  research indicates only about 80,000sqm currently remains available and this is diminishing weekly. 
 
“Beyond those buildings now under construction and the backfill space, there are no other new office buildings likely to be completed prior to 2014.
 
“It is likely the supply that will be available between now and 2014 will be insufficient to satisfy demand, as our studies indicate that the market is capable of absorbing between 165,000sqm and 180,000sqm of office space over the next three years,” said Mr Williams.
 
Further confirming Jones Lang LaSalle’s study is work by Access Economics which is forecasting an increase of 9,600 white collar workers in the Perth CBD and West Perth over the next five years, and 20,200 by 2021. Access’s projections for the Perth Statistical region are even more significant with an anticipated 96,000 white collar workers over the next five years and some 136,000 over the next decade.
 
“In view of this and unless other office projects are brought forward, we believe that rents in the short to medium term will enter a phase of escalation,” said Mr Williams.
 
“This leads us to forecast an average prime net effective rental growth of 7.6 per cent up to 2013. Thereafter rental growth will continue but at a more modest 2.8 per cent per year for the following two years, assuming that there is additional supply to that currently planned.
 
“Prime gross effective rents have been increasing by almost 4 per cent over the last three quarters and were sitting at an average of $691 per square metre at the beginning of the financial year.
 
“In conjunction with this we have, over the last 12 months, seen a decline in incentives for prime space to 12.5 per cent or 15 months on a 10 year lease.”
 
 Mr Williams said it is anticipated that incentives would continue to decrease between now and when the first of the backfill space comes to the market in mid-2012.