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News release

SYDNEY

Ageing offices need refurbishment ahead of anticipated market rebound

Jones Lang LaSalle advises improvements to sustainability is key and strategic refurbishments could pay dividends for owners of up to 21%


SYDNEY, 24 NOVEMBER 2009 – With less development of new commercial office buildings in Australia, the age profile of existing buildings will become an important focus in CBD markets, where 46% of stock in Sydney is over 30 years old, 38% in Melbourne, 35% in Brisbane and 32% in Perth.
 
According to a new White Paper from Jones Lang LaSalle, entitled “Refurbishing office assets in a down-cycle”, refurbishing ageing assets using current market conditions can help retain existing tenants and position assets ahead of the anticipated rebound in tenant demand in late 2011.
 
Head of Project and Development Services, Kevin Hastings said the research paper found that investing in refurbishments could pay dividends of up to 21% in the current market.  This compares to market conditions from 2003-2007, where there was a reduced rate of return from refurbishment.
 
“The market conditions between 2003 to 2007 reduced the return from refurbishment due to the combination of converging prime and secondary yields, the out performance of secondary rents relative to prime, and low vacancy rates.
 
“However, as the market becomes more discerning and yield spreads widen between prime and secondary assets, new construction activity slows and vacancy increases, the case for refurbishing and repositioning assets has become more compelling.”
 
Mr Hastings said Jones Lang LaSalle analysis found that strategic refurbishments can return an IRR (internal rate of return) of up to 21%.
 
“Timing is critical and the current market fundamentals have created a window of opportunity to consider refurbishing ageing assets in order to improve their competitiveness and increase the return on investment.
 
“The market factors that provide the current compelling case for refurbishment include increasing vacancies, reduced property values (particularly in secondary stock), a thinning supply pipeline and a firming rental outlook for better quality buildings in the medium term.
 
“Owners that act first, in anticipation of the expected rebound in tenant demand in late 2011 will have a clear advantage.”
Mr Hastings said refurbishment programs should be aligned to tenant need and could range from minor works to a major upgrade.  Minor works that require small capital expenditure can upgrade a tired building by improving the lobby or an uplift of the lift carriages.
 
“Jones Lang LaSalle scenario analysis for CBD’s in Sydney, Melbourne, Brisbane and Perth showed that both minor and major refurbishments modelled showed both minor and major refurbishments represented a significant improvement in asset values, with the major refurbishment providing the greatest overall return on investment.”
 
For example, minor refurbishment works that would reposition a low B-grade CBD building to a higher quality B-grade building, e.g. refreshing the lobby, improving power and cooling efficiencies, at a cost of $460 – $510 per sqm, would return an unleveraged project internal rate of return (IRR) of between 14-18%.
 
For major refurbishment works that would reposition that same low B-grade CBD building to an A-grade equivalent, at a cost of $1,100 - $1,450 per sqm would return an unleveraged project IRR of between 20-21%.
 
Major refurbishment works would likely include improving the building’s facade, providing high quality finishes to the lobby and other common areas, upgrading amenities, improving the building’s services (lift waiting times, general and back-up power provisions) and introducing much greater energy saving initiatives (to a 4.5 Star NABERS) to improve energy efficiency and overall sustainability.
 
Mr Hastings said landlords currently had a heightened focus on protecting the value of their assets through tenant retention strategies.
 
“A major challenge for owners of ageing properties is that tenants are demanding next-generation workspaces that have sustainable features.
 
“Even in a weakened market, sustainability is key when refurbishing an asset due to the continued evolution of tenant demand as well as legislative changes. Even relatively straightforward changes such as installing lighting timers and zoning to improve power efficiencies will provide simple returns in one or two years’ time,” he said.