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News release


The disconnect between office investment and the physical markets continues

Investors are reading through the current softness in the physical markets, deploying capital and generating pricing tension for core product

AUSTRALIA, 17 April 2013 – Statistics released by Jones Lang LaSalle Research show that office transaction volumes were strong in the first quarter, despite the softening in market fundamentals.

Jones Lang LaSalle recorded 23 office transactions above $5 million over the quarter totalling $1.5 billion. Furthermore, a number of large assets were in the advanced stage of due diligence at the end of the quarter.

Jones Lang LaSalle’s Head of Office Investments – Australia, Rob Sewell said, “Investor demand for core product is very robust. Offshore investors remain very active, domestic wholesale funds are looking to deploy capital, while the reduction in the cost of capital for large cap A-REITs has allowed them to be competitive for core product.”

Mr Sewell said, “Based on our experience in active campaigns and off-market activity, there is somewhere between $5 and $7 of capital chasing every $1 dollar of available core product across major CBD office markets.”
“Despite the competition for core product, the number of mandates is rising. A number of offshore investors, without an allocation to the Australian commercial property markets, are preparing strategy papers for investment committees to support an allocation to Australia,” said Mr Sewell.
Since 2008, offshore investors have acquired $11.83 billion worth of Australian office assets. They have only disposed of $2.47 billion worth of product.
In Q1, Bright Ruby (with the acquisition of 231 Elizabeth Street, Sydney) and Hines (465 Victoria Avenue, Chatswood) added to their Australian portfolios over Q1.
Mr Sewell said, “The competition for core is generating pricing tension across most CBD office markets. In the first part of 2013, we have recorded yield compression at the tighter end of the yield range in Sydney and Brisbane.”
The confidence expressed in the investment markets is not a function of the underlying demand conditions. In Q1, Australian CBD office markets recorded -90,700 sqm of net absorption.
Jones Lang LaSalle’s Head of Capital Market Research, Andrew Ballantyne said, “Corporate Australia is seeking ways to rationalise its cost base in order to protect and maintain margins. In an environment of cost containment, sub-lease availability has increased over the past 18 months.”
Approximately 78% of the negative net absorption figure can be attributed to a rise in sub-lease availability, over the quarter, when sub-lease availability increased to 1.66% of total stock.
“While sub-lease availability has increased in Australia, it remains well below the 2009 peak (2.0% of total stock) and below the level recorded in other mature markets. In the US, for example, sub-lease availability in the two largest markets – New York (2.3% of total stock) and Chicago (2.6% of total stock) is significantly higher than Australia,” said Mr Ballantyne.
Four of the six monitored CBD office markets recorded negative net absorption in Q1. As a result, the national CBD office market vacancy increased to 9.8%.
The softest result in Q1 was in the Brisbane CBD where Jones Lang LaSalle recorded negative net absorption of 57,000 sqm. Consequently, the vacancy rate in Brisbane moved out to 12.9%.
Mr Ballantyne said, “The downsizing of the public sector was the main contributor to this negative net absorption result. We estimate that the public sector accounted for 48% of negative net absorption. The resource and resource-related sectors accounted for 29% of the net absorption figure.”
“Public sector contractions had a disproportionate impact on the secondary grade sector of the market. The secondary vacancy rate in Brisbane increased to 16.6%, while the prime vacancy rate is half this at 8.3%,” said Mr Ballantyne.
The theme of higher occupancy rates in the prime sector of the market is replicated across most CBD office markets. The national CBD office market prime grade vacancy sits at 8.1%. In contrast, the vacancy rate for secondary grade assets is 11.7%.
Sydney (-34,500 sqm), Melbourne (-4,500 sqm) and Perth (-14,200 sqm) all recorded negative net absorption results in Q1. As a result vacancy increased to 9.5% in Sydney, 8.6% in Melbourne and 6.5% in Perth.
Adelaide (8,100 sqm) and Canberra (11,300 sqm) recorded positive net absorption over the quarter. Nevertheless, vacancy remained in low double digit territory at 10.9% in Canberra and 12.2% in Adelaide.
Mr Ballantyne said “The demand environment is challenging across office markets. Nevertheless, a number of lead indicators look firmer in the first part of 2013 than 2012. Labour market surveys have improved (off a low base) and global share markets have reached multi-year highs.”
“Historically, there is a reasonable relationship between movements in global and domestic equity markets and net absorption. Commercial property is a lagging indicator with improvement in demand occurring between one and three years after equity market gains,” said Mr Ballantyne.
The supply-side of the equation is well managed over the balance of 2013 and 2014. The development pipeline across CBD office markets is 481,000 sqm, equating to 2.9% of total stock.
“There is a misconception that completions equal supply in office markets. We expect that a number of functionally obsolete buildings will be withdrawn for refurbishment or conversion. As a result, supply additions will average 196,000 sqm over the next 24 months – significantly below the 10-year average of 337,700 sqm,” said Mr Ballantyne.