Savills Research Western Australia Briefing Perth CBD Office Highlights Continued recovery of the leasing market has been the trend in the Perth CBD, with vacancy now at its lowest point since June 2015; Tenant demand for Prime grade stock has been the driver of this reduction, resulting in limited contiguous tenancies in the market; Weight of capital shifting from the eastern seaboard as investors seek higher yielding assets; Foreign investment remains a feature, with more than 75% of transactions attributable to offshore capital; Signs of a strengthening economy with WA boasting the second highest increase in job ads in the country behind Tasmania. A Grade Averages Latest 12mo Diff Outlook Rental N.F. ($/sq m) 565 +0.0% Incentives (%) 48.8 +25bps Rental N.E ($/sq m) 290 +0.0% Yield Market (%) 6.90-35bps IRR (%) 7.50 +00bps Capital Values ($/sq m) 8,000 +1.3% Demand & Supply Latest Yr Before Vacancy (%) 18.5 19.8 Net Absorb. ( 000sq m) 15.3 47.3 Stock U/C ( 000sq m) 56.6 55.0 - % of market 3.2 3.1 - % committed 98.8 100
Report Contents Vacancy & Availability 3 Leasing Activity & Demand 4 Sales Activity 6 Supply 8 Development Map 9 Rents & Outlook 10 Key Indicators 12 Key Contacts 12 Shrabastee Mallik smallik@savills.com.au Director Nicholas Volk nvolk@savills.com.au Research Analyst For our latest national reports, visit savills.com.au/research To join Savills Research mailing list, please email research@savills.com.au Executive Summary Although mining investment, particularly in new iron ore projects, is less than half of what it was during the boom years of 2012-13, Western Australia remains the nation s leading mining investment destination and investment in new sectors is rising. BHP and its JV partners recently announced an investment of circa $4.7 billion to develop the South Flank Mine in the Pilbara. The project will be the single largest annual production iron ore mine that BHP has ever developed and is expected to generate 2,500 jobs during construction and about 600 operational roles once in operation. FMG has also committed approximately $1.7 billion on a new mine in Eliwana, with production of iron ore expected late 2020. The project is expected to create 1,900 construction jobs and 500 permanent positions, while in November, Rio Tinto approved its $3.5 billion Koodaideri mine. The strengthening performance and confidence in Western Australia from the CBD s largest tenants is a direct contributor to the dynamics of the office market. The State Government has projected business investment to return to growth from 2019, supported predominantly by large iron ore and LNG projects, however growth is expected to be modest relative to the previous upswing, suggesting a return to a more normal and sustainable investment level. Tenant demand, particularly for Prime stock, has strengthened considerably. This flight to quality has created a two-tiered market, where the gap between Prime and Secondary grade vacancy rates is increasing. The market is starting to see incentives in Premium space taper off, as well as in higher quality A grade buildings where occupancy is normalising. The last 12 months has been characterised by Australian real estate trusts and funds trading large-scale assets and offshore groups investing. The rise in investor appetite is reflective of confidence levels on the back of improvements in the leasing market. It must be noted that there are a number of large mandates in the market at the present time, with not only the ability to significantly impact leasing activity, but the ability to reduce the availability of Prime space in better quality assets. Comparatively speaking, average market yields are still high relative to other Australian markets, particularly Sydney and Melbourne, a factor, along with the strengthening market fundamentals that continues to be a drawcard for investors. PCA Summary Table Perth CBD (as at Dec-18) Premium A Grade Prime Secondary Total AUS CBD Total Stock ( 000) 302.2 780.0 1,082.1 677.1 1,759.2 17,902.6 Total Vacancy ( 000) 13.5 126.8 140.3 185.5 325.8 1,482.7 Vacancy (%) 4.5 (6.1) 16.3 (12.3) 13.0 (10.3) 27.4 (16.9) 18.5 (13.0) 8.3 (9.4) Net Absorption ( 000) -45.2 (4.6) 58.9 (9.9) 13.7 (14.5) 1.7 (1.2) 15.3 (15.7) 230.7 (181.3) Net Absorption (%)* -13.5 (1.7) 9.9 (1.7) 1.5 (1.7) 0.3 (0.2) 1.1 (1.2) 1.4 (1.2) Net Additions ( 000) -54.2 (5.9) 55.0 (21.8) 0.8 (27.7) -10.7 (18.9) -9.8 (46.6) -46.2 (257.6) Stock Additions ( 000) 0.0 55.0 55.0 0.0 55.0 317.8 Stock Withdrawals ( 000) 54.2 0.0 54.2 10.7 64.8 364.5 Net Additions (%) -15.2 (2.2) 7.6 (3.3) 0.1 (3.0) -1.5 (3.3) -0.6 (3.1) -0.3 (1.6) (10yr Averages shown in brackets); NB: Secondary Rents shown are for B Grade; All rents equivalent to whole floor mid-rise *As a percentage of occupied stock savills.com.au/research 2
Vacancy In Perth, PCA data showed the CBD office vacancy rate falling 90 basis points in the six-month period to December 2018, with leasing activity showing an uplift and recentralisation a recurring theme among occupiers. The significant decline in vacancy was a direct result of the key trends of 2018 recentralisation to the CBD and the flight to quality, clearly evidenced by the divergence in direction of the premium and A-grade vacancy, both of which are declining, compared to Sydney levels in the case of premium stock, while lower-grade stock continues to increase. Savills Research forecast the vacancy rate to fall further over the next 5 years, in line with limited upcoming supply and strengthening demand drivers. Historic Vacancy Rate (Perth CBD) Full Floor Availability by Period 35% Prime Secondary Total 30% 25% 20% 15% 10% 5% 0% 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Premium (sq m) A Grade (sq m) In 6 Mths 6-12 Mths 1-2 Yrs > 2 Years Source: PCA OMR / Savills Research Full Floor Availability In Savills Prime Full Floor Availability Report, the state of the leasing market is assessed in a different manner to most vacancy surveys. The report considers Premium and A grade buildings in the city on a floor-by-floor basis, identifying whole floors competing for tenants - both now and in the future - including those under construction and refurbishment, along with backfill space created by pre-commitment. As at January 2019, 129 full floors are available in the Perth market, a decrease from 146 a year prior. Having peaked at 180 available floors in August 2016, the reduction highlights the trend of tenants seeking quality space and taking advantage of generous incentives on offer in the CBD. Of the 129 Prime floors vacant, 108 are available for immediate occupation, six are available in six to 12 months, while 15 are available in 12 to 24 months as a mix of new developments and backfill space. While overall vacancy remains relatively high, the availability of contiguous space is limited, with only five building options over 5,000 square metres and two options over 10,000 square metres available for tenants as at January 2019. By Grade By Precinct Total Premium A Grade West CBD Mid CBD East CBD Total Prime Floors (No) 876 223 653 554 225 97 Total Prime NLA (sq m) 1,202,708 358,144 844,564 783,066 298,464 121,178 Prime Floors Available (No) 129 23 106 86 29 14 Prime Full Floor Avail. (sq m) 145,080 39,413 105,667 104,168 24,692 16,220 Prime Full Floor Avail. (%) 12.1 11.0 12.5 13.3 8.3 13.4 Max Contiguous Floors (No) 13 6 13 13 7 6 Max Contiguous Area (sq m) 14,166 14,166 12,691 14,166 4,759 6,186 savills.com.au/research 3
Leasing Activity & Demand Savills identified 68,475 square metres of leasing activity (>1,000 square metres) in the Perth CBD office market in the 12 months to December 2018, marginally above activity 12 months prior. It was however down on the 10 year average of 93,344 square metres. Most leasing activity was recorded in the West CBD precinct, accounting for 66.6% of the total. Over 50,000 square metres of leases were recorded in the 1,000 to 5,000 square metre size range, accounting for the majority of deals within this period. The Mining, Utilities and Industry sector remained the most dominant sector in the last 12 months, accounting for 42.8% of total recorded leasing activity. Notably, Wood Group secured 9,198 square metres at 240 Georges Terrace in August 2018. Leasing Activity by Precinct (> 1,000 square metres) 250,000 East CBD Mid CBD West CBD 200,000 150,000 100,000 50,000 - Leasing Activity by Tenant Type (>1,000 square metres) The Government & Community sector were the second most active sector, accounting for 20.7% of total leasing activity. The Department of Human Services secured approximately 15,000 square metres across two A grade offices, with a 10 year deal signed at 556 Wellington St for 8,495 square metres and a 3 year lease signed for 4,542 square metres at 226 Adelaide Terrace. We are likely to see leasing volumes continue to be supported by the recentralisation trend, as lessees look to capitalise on high incentives. This trend is further complemented with development projects such as Elizabeth Quay and Perth CityLink adding greater amenity to the area and increasing the attractiveness of the CBD to prospective tenants. Mining - 42.8% Govt & Community - 20.7% Fin & Ins - 13.2% Prop & Bus Serv - 12.8% W'Sale & Retail - 7.4% IT & Comm - 3.1% Net Absorption vs. Growth in Professional Job Ads 200,000 Annual Net Abs. - PER CBD Prof. Job Ads - WA 150,000 100,000 50,000 - (50,000) (100,000) 60% 40% 20% 0% (20%) (40%) (60%) Source: DOE / Savills Research savills.com.au/research 4
Professional job advertisements in Perth were up 15.4% in the last 12 months and despite the base being significantly lower than the east coast cities, Perth has continued to show significant year on year growth over the past 18 months, in line with the mining resurgence. Professional Job Advertisement Growth by State (Dec-18) ACT 0.3% QLD 8.9% NSW SA AUS 9.0% 9.8% 10.1% VIC 12.4% WA 15.4% 0% 5% 10% 15% 20% Source: DOE / Savills Research Recent Notable Leases (by Area Leased) Tenant Property Date NLA (sq m) Type Rent Term 240 St Georges Tce Wood Group Aug-18 9,198 Direct n.a n.a. 556 Wellington St Dept of Human Services Oct-18 8,495 Direct n.a 10 226 Adelaide Tce Dept of Human Services Aug-18 4,542 Direct 425 (N) 3 240 St Georges Tce CBH Group Apr-18 3,790 Direct n.a n.a. 77 St Georges Tce Minter Ellison Jun-18 3,440 Renewal 565 (N) 5 240 St Georges Tce Macquarie Bank Sep-18 3,311 Direct n.a n.a. 556 Wellington St P&N Bank Jul-18 3,249 Direct 525 (N) 10 240 St Georges Tce Iluka Resources May-18 3,238 Direct n.a n.a. 556 Wellington St BG&E Jul-18 2,448 Direct 565 (N) 10 178 St Georges Tce Exxon Mobil May-18 2,316 Renewal n.a n.a. 15-17 William St Virtual Gaming Worlds Feb-18 2,129 Direct n.a 7 140 St Georges Tce Anglo Gold Ashanti Sep-18 2,110 Direct 550 (N) 7 256 Adelaide Tce Minnovo Feb-18 2,033 Direct 300 (N) 5 Leasing Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal savills.com.au/research 5
Sales Activity In the 12 months to December 2018, Savills identified approximately $597.4 million of office transactions (above $5 million) in the Perth CBD. This was down slightly from the previous 12 months however largely in line with the 10 year average ($608.5 million). Eight transactions were concluded over 2018, a figure similar to the years prior with seven in 2017 and 10 in 2016. A number of transactions featured a price point of more than $100 million, with the major sale for the year being the divestment of Exchange Tower for $326 million. The property was purchased by Singaporean sovereign wealth fund GIC on a yield of 6.3% and is the largest sale by price since Charter Hall s $458 million purchase of Raine Square in 2013. Foreign investor activity within the Perth CBD was strong throughout this period, with five of the seven transactions drawing capital from overseas as investors continue to search for higher yielding assets away from the historically low yields of the east coast markets. Notably, this included the sale of 55 St Georges Terrace at the beginning of 2018. Zone Q purchased the B grade office asset from Aberdeen Standard Life in an off market deal for $44.2 million and representing an equated yield of 6.93%. It was part of a deal that included the sale of 182 St Georges Terrace which sold for $21.1 million, also purchased by Zone Q. Despite foreign investment dominating the market over the course of 2018, local investment was still evident with Elanor Investors Group acquiring Workzone West from Charter Hall for $125.25 million in June 2018. The A grade property is part of a twin-tower complex, which includes Workzone East that was acquired by CorVal at the end of 2016 for $68.25 million. Sales Activity by Price (> $5 million) $1,600m $5m - $50m $50m - $100m >$100m $1,400m $1,200m $1,000m Vendor & Purchaser Type (> $5 million) Purchasers Yield Spread to Bond & IRR Perth CBD 14% 10yr Bond Rate Average Perth CBD (Grade A Yield) 12% Average Perth CBD (Grade A IRR) 10% $800m $600m $400m $200m $0m Vendors 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other 8% 6% 4% 2% % Source: RBA / Savills Research savills.com.au/research 6
Market yields in the Perth CBD, as at December 2018, are estimated to range between 5.75% and 6.75% for Premium grade buildings, between 6.25% and 7.50% for A grade buildings, and between 7.50% and 8.75% for B grade buildings. Capital values in the Perth CBD, as at December 2018, are estimated to range from $9,000 per square metre to $12,500 per square metre for Premium grade buildings, between $7,000 per square metre and $9,000 per square metre for A grade, and between $4,750 per square metre and $6,500 per square metre for B grade buildings. These figures remained largely unchanged over the 12 month period. In context, the differential between capital values for the Perth and Sydney CBD markets is the highest it has ever been. Demand from both domestic and international capital is recognising Perth as a counter-cyclical play and an opportunity to take advantage of greater yields in comparison to the eastern seaboard. Capital Value ($/sq m) vs. Market Yield 12,000 Capital Value - PER CBD Market Yield (RHS) 10,000 8,000 6,000 4,000 2,000 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% Recent Notable Sales (by Sale Price) Property Price ($m) Date NLA Yield Type $/sq m 2 The Esplanade 326.10 Dec-18 34,284 6.30 r 9,025 20 Brown St 7.10 Aug-18 1,145 n.a n.a 6,201 202 Pier St 125.25 Jun-18 15,602 7.04 e 8,028 441 Murray St 22.00 Apr-18 5,849 7.44 e 3,761 182 St Georges Tce 21.10 Feb-18 5,414 8.02 e 3,897 55 St Georges Tce 44.20 Feb-18 8,329 6.93 e 5,307 6-8 Bennett St 43.50 Jan-18 10,211 8.15 e 4,260 ; i = Initial, r = Reported, e = Equated, v = Vacant, dev = development *Part of portfolio sale savills.com.au/research 7
Supply The market has swung through the bottom of the cycle into recovery, with recent employment growth and a strengthening resources outlook aiding positive net absorption and developer confidence for new projects. Capital Square, the new headquarters for Woodside, reached practical completion in July 2018. Having relocated at the end of 2018, Woodside created backfill space of approximately 40,000 square metres. A number of tenants have already secured space within the building, including CBH Group, HWL Ebsworth and Iluka Resources, Wood Group, and Macquarie Bank. In October, Chevron lodged a development application for a 30-storey mixed use development comprising 52,187 square metres of office space (including lobby, conference facilities) for Lot 7 The Esplanade, Elizabeth Quay; currently on public notification as of December 2018. Chevron acquired Lots 7 and 8 in 2013 for $64 million, and in June 2018 reported they would be moving ahead with the project with Brookfield appointed as developer. The oil and gas giant currently occupies a number of buildings within the Perth CBD, including approximately 28,000 square metres at QV1, with expiry estimated to be in line with the completion of the new build. Net Supply by Year (square metres) 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - (20,000) (40,000) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: PCA / Savills Research Savills Forecast Historic Net Additions 15yr Avg In December 2018, Brookfield gained approval for its $122 million Elizabeth Quay Bus Station redevelopment. The project involves a refurbishment of the station s transit hall and the construction of a nine level office building of approximately 18,000 square metres above. savills.com.au/research 8
Development Map LEGEND West Perth Statistical Division 6 MURRAY ST ROE ST Statistical Division 5 KINGS PARK RD HAY ST MILLIGAN ST 3 KING ST 1 ST GEORGES TCE WILLIAM ST PERTH 2 WELLINGTON ST Statistical Division 4 Statistical Division 3 Statistical Division 2 Statistical Division 1 4 BARRACK ST HILL ST ADELAIDE TCE PLAIN ST The table below details the major upcoming and planned development projects in the Perth CBD. Building Address Dev Stage NLA Exp. Comp Precinct Tenants 1 2 3 4 Glassbox, 300 Murray St UC 1,910 2019 West CBD - 28 St Georges Tce UC 1,028 2019 East CBD RSL Elizabeth Quay Bus Station, EQ PA 52,355 2023 Mid CBD Chevron Chevron HQ, Lots 7 & 8, EQ PA 18,000 2023 West CBD - Source: Cordell / Savills Research; UC = Under Construction, EP = Early Planning, PS = Plans Submitted, PA = Plans Approved. savills.com.au/research 9
Rents As at December 2018, net face rents in Perth typically range from $600 to $725 per square metre per annum for Premium grade, $475 to $650 per square metre per annum for A grade and $250 to $475 per square metre per annum for B grade. There has been minimal change to these rents since December 2015. Incentives began to rise in 2013, resulting in a decline in net effective rents of between 40% and 50% over the three years to 2016. Although incentive levels still vary greatly between buildings, incentives in Prime grade in the CBD are close to 47.5% to 50% on average. Secondary grade incentives are slightly higher, averaging 50% or above in some cases. Net effective rents at December 2018 typically range from $320 to $390 per square metre per annum for Premium, and between $245 and $330 per square metre per annum for A grade, representing only minor changes over the year to December 2018. With Premium vacancy as at December 2018 of 4.5%, and options for tenants in this space disappearing, incentives are expected to decline further over the course of the year, with effective rental growth occurring as a result. Net Effective Rents by Grade ($/sq m) 900 Premium Grade A Grade B 800 700 600 500 400 300 200 100 - Net Face & Net Effective Rents as at Dec-18 ($/sq m) Net Face Rent Net Effective Rent Net Incentive % - rhs 700 665 53 600 565 52 51 500 50 400 355 365 49 290 48 300 47 200 175 46 45 100 44-43 Premium Grade A Grade B Outlook Tenant appetite for Prime space has been elevated and we expect to see a continuation of this trend moving forward to the extent that the upper end of the market will continue to pull-back on incentives. Effective rental growth is already being seen in Premium grade space, albeit at low levels. Expect to continue to see a gradual reduction in Premium and A grade net incentives moving forward, returning net effective rental growth to Perth. There are several development projects in the pipeline and after three years, with no new construction outside of Woodside s completed headquarters, there are signs that a new development cycle is emerging. In June 2018, Chevron reported they would be moving ahead with their project with Brookfield appointed as developer to build the circa 52,000 square metre building in Elizabeth Quay. Timing on the new development is estimated to align with Chevron s current lease tails around 2023. Tenant flight to quality has already driven a large gap between Prime and Secondary vacancy, and with no new buildings for at least three years, the technical vacancy rate is likely to decline. Investment capital inflows to Perth remain elevated and well above the long-run average suggesting that Perth remains on the radar for offshore and domestic investors. While the price differential between Perth and the eastern seaboard still exists, ongoing compression and eventual rise of bond rates is making it more competitive for investors. On that note, we may see some investors move up the risk-curve seeking value-add or repositioning strategies an outcome that bodes well for Secondary space in Core locations, particularly along the Terrace. savills.com.au/research 10
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Perth CBD Key Indicators (Q4-18) Premium A Grade B Grade Low High Low High Low High Rental - Gross Face ($/sq m) 775 900 640 815 410 635 Rental - Net Face ($/sq m) 600 725 475 650 250 475 Incentive Level Net 45 48 45 53 50 55 Rental - Net Effective ($/sq m) 320 390 245 335 120 225 Outgoings - Operating ($/sq m) 115 125 95 120 95 110 Outgoings - Statutory ($/sq m) 50 60 50 60 50 60 Outgoings - Total ($/sq m) 165 185 145 180 145 170 Typical Lease Term 5 10 5 7 3 5 Yield - Market (% Net Face Rental) 5.75 7.00 6.50 7.50 7.50 8.75 IRR (%) 6.75 7.50 7.00 8.00 7.50 8.50 Cars Permanent Reserved ($/pcm) 675 750 625 725 475 625 Cars Permanent ($/pcm) 675 750 625 725 475 625 Office Capital Values ($/sq m) 8,500 12,500 7,000 9,000 4,750 6,500 NB: All rents equivalent to whole floor mid-rise Key State Office Contacts Research Shrabastee Mallik +61 (0) 2 8215 8880 smallik@savills.com.au Office Leasing Graham Postma +61 (0) 8 9488 4153 gpostma@savills.com.au Valuations Mark Foster-Key +61 (0) 8 9488 4145 mfosterkey@savills.com.au Project Management Graham Nash +61 (0) 8 6271 0306 gnash@savills.com.au Asset Management Robert Agnew +61 (0) 8 9488 4104 ragnew@savills.com.au City & Metropolitan Sales Chas Moore +61 (0) 8 9488 4155 cmoore@savills.com.au Capital Transactions Nick Charlton +61 (0) 8 9488 4120 ncharlton@savills.com.au Occupier Services Mark Smith +61 (0) 8 9488 4131 msmith@savills.com.au The Savills Research & Consultancy team has years of experience, and is supported by our extensive agency, property management and valuation professionals. For national-level consultancy or subscription requirements please contact: Capital Strategy & Research Shrabastee Mallik +61 (0) 2 8215 8856 smallik@savills.com.au Savills is a leading global property service provider listed on the London Stock Exchange. Trusted since 1855, we have extensive experience across the Asia Pacific, with over 50 offices, and in Australia, we have over 800 staff focused on meeting all your property needs. This information is general information only and is subject to change without notice. No representations or warranties of any nature whatsoever are given, intended or implied. Savills will not be liable for any omissions or errors. Savills will not be liable, including for negligence, for any direct, indirect, special, incidental or consequential losses or damages arising out of our in any way connected with use of any of this information. This information does not form part of or constitute an offer or contract. You should rely on your own enquiries about the accuracy of any information or materials. All images are only for illustrative purposes. This information must not be copied, reproduced or distributed without the prior written consent of Savills. savills.com.au/research 12