The Case for the CBD Perth Office market – the investment proposition

JLL Report outlines factors which could limit the extent of the current downturn in Perth

September 02, 2015

A new JLL Research paper argues there is a strong investment case for investors looking at Perth's CBD Office market and also many positive factors which may limit the extent of the current downturn in Perth's office markets.

The report, titled 'Perth CBD office market – The investment proposition' states that Perth's average total returns for office investors over the 10, 15 and 20 year time frames have been stronger than any other capital city CBD market in Australia.  This is despite the challenging market conditions over the last two years.

JLL Research forecasts suggest that Perth CBD's prime effective rents will remain the second highest in Australia after Sydney CBD on a ten-year outlook.

JLL's WA Managing Director, John Williams said, "The Perth CBD office market is coming towards the end of a challenging market downturn, which has seen vacancy rates increase significantly, effective rents decline, and a contraction of over 200,000 square metres in occupied space.

"Despite recent performance, the Perth CBD remains a market with strong long-term investment potential. The market is expected to benefit from relatively strong long tern population growth, economic growth and employment growth. Furthermore, Perth provides a 'core-plus' investment opportunity, with average prime grade yields 138 basis points above that of the Sydney CBD," said Mr Williams.

JLL's analysis identified several factors which may limit the duration of the current downturn:

  • Interest rates and debt costs are near all-time lows, reducing the hurdle rates for investors and supporting capital values. In contrast to the early 1990s, when all CBD markets experienced a coordinated downturn, the Sydney and Melbourne CBD markets are currently in an upswing; Perth will not therefore be competing on price with these markets for investment capital;
  • The global hunt for yield and the structural mismatch between the demand and supply of institutional grade real estate will ensure that Perth remains on the menu of major investors;

While commodity prices have fallen since mid-2014, iron ore, gold and copper prices remain above 10 and 20-year average levels.  Local mining activity is further supported by the 20% depreciation of the AUD against the USD over the same period.

Perth – a Core-Plus opportunity:

The JLL Report notes that Core assets in eastern seaboard CBD markets remain the focus for major investors, including offshore sovereign wealth funds, A-REITs and wholesale funds. However, the weight of capital and scarcity of quality product that meet fund managers' key investment criteria are driving investors to consider assets in other markets and non-core locations.

Mr Williams said, "One of the attractions of the smaller CBD markets such as Perth is that prime grade assets with a strong tenant profile have higher yields than similar assets in the Sydney or Melbourne CBD market.

"As at the second quarter of this year, the prime yield range for the Perth CBD office market was 6.50%-8.25%. The mid-point (7.38%) of the Perth prime grade yield range is 138 basis points higher than the Sydney CBD prime midpoint yield. Over the past 10 years, prime grade yields in Perth CBD have been an average 114 basis points higher than prime grade Sydney CBD yields.

"This relatively high yield has provided prime CBD assets in Perth with relatively high total returns over the long-term. Furthermore, prime assets in the Perth CBD have typically attracted high profile corporate and government tenants, providing prime CBD assets with strong lease covenants," said Mr Williams.

Strong long-term total returns in Perth Office market:

Mr Williams said, "Despite a challenging period where corporates have downsized, leading to elevated vacancy rates and a decline in effective rents, the Perth CBD office market has still provided strong long-term total returns over the last 10 to 20 years. JLL has compared the total returns for Australia's major CBD markets over the last 10, 15 and 20 years. Perth CBD has outperformed each CBD market over these time periods."

Source: JLL Research