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News release


An unprecedented time in Australian office markets

While the physical market conditions are weak, investor demand for core product is strong

AUSTRALIA, 11 July 2013 – Statistics released by Jones Lang LaSalle Research highlight the divergence between the investment and physical markets over the 2012/13 financial year.

Jones Lang LaSalle recorded $12.3 billion worth of office transactions (above $5 million) over the 2012/13 financial year. The year was characterised by a number of large deals in excess of $100 million (26 transactions).

Jones Lang LaSalle’s Head of Office Investments – Australia, Rob Sewell said, “Most of the buyer groups for core product – A-REITs, domestic wholesale funds, superannuation funds and offshore investors – are engaged in the market at the moment.”
Mr Sewell said strong investor demand for core product resulted in pricing tension and yield compression in the 2012/13 financial year.
“Yield compression was concentrated in modern assets with long-dated leases. We recorded about 25 basis points of compression at the tighter end of the yield range in the Sydney, Melbourne and Brisbane CBDs.
“In contrast, those assets with upcoming leasing risk or capital expenditure requirements were priced according to physical market conditions. As a result, we saw a widening of the yield spread between core and lower quality A Grade assets in most CBD office markets,” said Mr Sewell.
Based on Jones Lang LaSalle’s analysis of under-bidders in large transactions, at least $6 billion worth of unsatisfied capital is looking to be placed into core product.
Mr Sewell said, “New capital sources are emerging from offshore to supplement the competition for core CBD product. There is, however, a shortage of available assets to satisfy these mandates.
“We will see a number of investors willing to compromise on location for additional yield. Nevertheless, passive investors are unlikely to compromise on asset quality. As a result, the 2013/14 financial year will see greater liquidity in fringe and suburban markets for product with core characteristics,” said Mr Sewell.
The physical market conditions were challenging over the 2012/13 financial year. Jones Lang LaSalle recorded negative net absorption of -191,900 sqm and a rise in the national CBD office market vacancy rate to 10.9%. Vacancy is now at the highest rate since June 1999 (11.1%). To put this figure in context, the 2012/13 financial year net absorption result was weaker than the 2008/09 figure (-117,800 sqm), which covered the global financial crisis.
Jones Lang LaSalle’s Head of Capital Market Research, Andrew Ballantyne said, “There is no precedent for what is occurring in Australian office markets. Investment activity remains robust, while the 2012/13 financial year can be best described as an – annus horribilis for the physical markets.
“It is important to note that this is not solely an Australian story. The mature office markets of Western Europe and North America are recording strong capital inflows and pricing tension, despite higher vacancy rates,” said Mr Ballantyne.
Five of the six CBD office markets are recording double digit vacancy rates. Brisbane (14.3%), Adelaide (12.7%) and Canberra (11.6%) recorded higher vacancy over the quarter, while Sydney (10.2%) and Melbourne (10.0%) moved above 10% for the first time in the current cycle. Perth (7.9%) is the only CBD office market now recording vacancy below 10%.
Mr Ballantyne said, “Corporate Australia is adjusting to a lower growth outlook over the short-term and rationalising their cost base in order to protect and maintain margins. As a result, sub-lease availability has increased over the 2012/13 financial year.”
Approximately 75% of the negative net absorption figure in 2012/13 can be attributed to a rise in sub-lease availability. Over the course of the financial year, sub-lease availability has increased from 1.02% of total stock to 1.88% of total stock.
Mr Ballantyne said, “Recent surveys of business confidence and job advertisements remain a bit below-trend, highlighting that the demand environment will remain challenging over the remainder of 2013 and potentially for the first part of 2014.
“The medium-term demand prognosis, however, is firmer. The Reserve Bank of Australia has adopted an accommodative monetary policy setting, supporting interest rate sensitive sectors of the economy and assisting the transition from mining to non-mining sectors of the economy,” said Mr Ballantyne.
The supply-side of the equation is well managed over the next 18 months. The development pipeline across CBD office markets is 384,400 sqm, equating to 2.3% of total stock, with almost two-thirds pre-committed.
Net supply additions, which are adjusted for stock withdrawals, will be significantly lower over the next 18months.
“A higher vacancy rate will precipitate a flight to quality and further widen the rental spreads and yield profile between prime and secondary grade assets. As a result, a number of withdrawals for refurbishment or conversion will occur and net supply additions are projected to be around 200,000 sqm, or 1.2% of total stock, over the next 18 months,” concluded Mr Ballantyne.