Savills Research Western Australia Briefing Perth CBD Office Highlights The Perth CBD office market has started to see some gains from flight to quality and centralisation trends, resulting in the highest six month net absorption rate of the national CBD markets; The volume of leasing transactions by the mining sector has been rising over the last two years, and is now at its highest level since the lows of 2012/13; Underpinned by the flight to quality trend, Prime grade vacancy rate has declined for the first time since 2012; Investment yields have continued to compress but current conditions suggest that this has not fully run its course in Perth yet, with the high yield spread between Perth and other major CBD markets driving strong competition for assets A Grade Averages Latest 12mo Diff Outlook Rental N.F. ($/sq m) $565 +0.0% Incentives (%) 47.5 +00bps Rental N.E ($/sq m) $295 +0.0% Yield Market (%) 7.50% -50bps IRR (%) 8.00% -50bps Capital Values ($/sq m) $7,900 +6.8% Demand & Supply Latest Yr Before Vacancy (%) 21.1% 21.8% Net Absorb. ( 000sq m) 13,126 18,206 Stock U/C ( 000sq m) 55.00 62.59 - % of market 3.1% - % committed 100%
Report Contents Vacancy & Availability 3 Leasing Activity & Demand 4 Sales Activity 6 Supply & Development 8 Rents & Outlook 9 Key Indicators 10 Key Contacts 10 For our latest national reports, visit savills.com.au/research To join the Savills Research mailing list, please email research@savills.com.au Executive Summary The Perth CBD has traditionally been a primary location for global resource companies in Australia. The state s rich mineral resources, close proximity to Asia and skilled workforce has attracted some of the world s largest corporations, many of them using Perth for their regional headquarters. The CBD itself consists of a diverse range of businesses, which have been supported by tourism and those working in the resources sector or associated industries. There has been a decrease in resource sector investment since 2012 as major projects transitioned from construction to operational phase. Although the rate of economic growth has moderated when compared to the mining boom years, it is important to recognise that the market is coming off record highs and that the investment pipeline remains firm. Confidence is returning to the sector and tenant demand, particularly for Prime, has strengthened considerably. Incentives and rents have begun to stabilise and the vacancy rate has shown the first signs of recovery, particularly in Prime grade space where demand is the greatest. This flight to quality is creating a two-tiered market, where the gap between Prime and Secondary grade vacancy rate is increasing. While the market has a higher proportion of Prime stock, the availability of these options, particularly within traditional city locations, eg. St Georges Tce and the like, is abating. The most surprising win for Perth CBD recently is its six month net absorption figure, which is the highest of all the major CBD markets for that period. The weight of capital is still placing downward pressure on investment yields resulting in a further 50 basis point drop in the six months to June 2017. Despite this trend, the wide yield spread between Perth and other major markets remains very attractive, providing significant incentive to investors looking at counter-cyclical opportunities. PCA Summary Table Perth CBD (as at Jun-17) Premium A Grade Prime Secondary Total AUS CBD Total Stock ( 000) 356.3 726.3 1,082.6 686.4 1,769.0 18,018.7 Total Vacancy ( 000) 41.6 140.9 182.5 190.5 373.0 1,772.9 Vacancy (%) 11.7 (5.3) 19.4 (9.7) 16.9 (8.4) 27.8 (12.8) 21.1 (10.2) 10.5 (8.6) Net Absorption ( 000) 17.8 (7.2) 3.8 (3.6) 21.6 (10.8) -8.5 (1.6) 13.1 (12.4) 188.1 (199.0) Net Absorption (%)* 6.0 (2.6) 0.7 (0.6) 2.5 (1.3) -1.7 (0.3) 0.9 (0.9) 1.2 (1.3) Net Additions ( 000) 0.0 (11.3) 0.1 (17.5) 0.1 (28.9) 0.7 (19.9) 0.8 (48.8) 125.5 (325.6) Stock Additions ( 000) 1.2 1.2 4.6 5.8 495.7 Stock Withdrawals ( 000) 1.1 1.1 3.9 5.0 376.4 Net Additions (%) 0.0 (3.9) 0.0 (2.8) 0.0 (3.2) 0.1 (3.5) 0.0 (3.3) 0.7 (2.0) (10yr Averages shown in brackets; NB: Secondary Rents shown are for B Grade; All rents equivalent to whole floor mid-rise savills.com.au/research 02
Vacancy The first signs of recovery have begun to emerge in the Perth CBD office market, with strong tenant demand for Prime grade triggering a significant decline in Prime vacancy in the first half of the year the first recorded since 2012. While the headline vacancy rate has only decreased marginally over the 12 months to June, the gap between Prime and Secondary vacancy has increased, resulting in a distinct two-tiered market. One of the most telling signs of recovery is the shift from negative absorption to positive, with the Perth CBD office market recording the highest net absorption figure of all Australian CBD markets in the six months to June 2017. Notably, the turnaround in net absorption, predominantly in Prime grade stock, is a direct result of positive tenant demand. It has not been supply-led through pre-commitment.. Historic Vacancy Rate (Perth CBD) Full Floor Availability by Period 30% Prime Secondary Total 25% 20% 15% 10% 5% 0% 180,000 160,000 140,000 120,000 100,000 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 / PCA OMR 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. Compared to June 2016, the number of full floors available has decreased from 179 to 167 in June 2017, having peaked at 180 floors in August 2016. Of the 167 prime floors vacant, 144 are available for immediate occupation, three floors will be available between six and 12 months and 19 floors are in new developments or backfill space that will become available between one and two years. While overall vacancy is high, the availability of larger contiguous areas remains somewhat limited, with just six 5,000 square metre and two 10,000 square metre opportunities being available in the market as at June 2017. By Grade By Precinct Total Premium A Grade West CBD Mid CBD East CBD Total Prime Floors (No) 871 222 649 536 253 82 Total Prime NLA (sq m) 1,122,885 354,071 768,814 763,114 254,234 105,538 Prime Floors Available (No) 166 38 128 109 48 9 Prime Full Floor Avail. (sq m) 205,341 63,835 141,506 147,964 42,427 14,950 Prime Full Floor Avail. (%) 18.3% 18.0% 18.4% 19.4% 16.7% 14.2% Max Contiguous Floors (No) 18 8 18 18 4 3 Max Contiguous Area (sq m) 23,400 16,527 23,400 23,400 4,350 6,310 savills.com.au/research 03
Leasing Activity & Demand In the 12 months to June 2017, Savills identified approximately 122,034 square metres of leasing activity (>500 square metres) in the Perth CBD office market. Although this is down on the 12 months prior, it is almost on par with the five year average (124,241 square metres). The majority of these leases (approximately 85.2% of total space) occurred in the Mid CBD and West CBD precincts. Of the 122,034 square metres identified as leased in Perth CBD in the last 12 months, Mining, Utilities and Industry was the dominant sector, accounting for 40% of transactions by area. The largest number of transactions was through the Property & Business Services sector. As reflected in the declining vacancy rate for Prime stock, the majority of leases occurred in Premium and A grade buildings over the last 12 months, (approximately 83% by volume). Off the back of the iron ore price recovering from the record lows of 2015, there are green shoots emerging in the energy and resources sector. The volume of leasing transactions by the Mining, Utilities and Industry has been rising over the last two years, and although not back to the peak of 2012, it is at the highest level since the lows of 2013. Two of the largest deals in the last 12 months include new leases to sitting tenants, Inpex, a Japanese oil and gas company, and Quadrant Energy, an Australian oil and gas company, in 100 St Georges Terrace. Inpex has committed to 13,379 square metres and Quadrant, 7,081 square metres. As part of the renewals, a significant refit will be undertaken to their floors. Leasing Activity by Precinct 250,000 East CBD Mid CBD West CBD 200,000 150,000 100,000 50,000 - Leasing Activity by Tenant Type Mining - 39.6% Prop & Bus Serv - 24.4% Fin & Ins - 13.4% IT & Comm - 10.9% Govt & Community - 10.3% Undisclosed - 1.4% Rec Serv - 0.0% While there continues to be examples of firms seeking to rationalise space requirements through relocation strategies, including the consolidation of separate tenancies, an increasing number of tenants have upgraded and taken on, or taken back expansion space. Chevron has taken expansion space in 256 St Georges Terrace and Worley Parsons has leased floors in 18 Mount Street. Link Market Services has also consolidated offices and taken expansion space in QV1. Westpac has leased three floors (6,300 square metres) in Brookfield Place Tower 1 and will be consolidating its some of its offices, the largest being from 109 St Georges Terrace, when the new fitout is completed later this year. Telstra, whose Perth headquarters was at 80 Stirling Street, leased two floors in Workzone East at 1 Nash Street on a 10-year lease at the end of 2016. After missing out on Brookfield Place Tower 2, Telstra has taken an additional 3,316 square metres in Brookfield Place Tower 1. Net Absorption vs. Job Ads 200,000 Annual Net Abs. - PER CBD Prof. Job Ads - WA 150,000 100,000 50,000 - (50,000) (100,000) Source: DOE / Savills Research 60% 40% 20% 0% (20%) (40%) (60%) savills.com.au/research 04
Another telling trend has been the increase in the number of tenants that have migrated to the CBD from non- CBD locations, including West Perth. In 2016, examples included Bethanie and NBNCo, who both relocated from suburban locations to Workzone West. More recently, Kufpec relocated from Subiaco to Alluvion on Mounts Bay Road and Optus to 2 Victoria Avenue from West Perth. Dentsu Aegis Network (DAN) also has plans to relocate to the CBD from their North Perth location later this year. Derwent Executive is also relocating from West Perth, having leased a part floor in 240 St Georges Terrace recently. Grant Thornton has leased two floors in Central Park and will relocate from West Perth later this year. Growth in demand and centralisation to the CBD from legal tenants over the last 12-18 months have also been a feature, as noted in the following deals. Legal firm Gilbert & Tobin has leased part of level 16 in Brookfield Place Tower 2, relocating from West Perth. While Holman Fenwick Willan, leasing part level 15 has doubled in size. More recently, Leach Legal has leased a part floor in 240 St Georges Terrace, relocating from West Perth. Office Job Ad Growth by State (Jun-17) QLD -1.7% NSW -0.8% WA -0.3% AUS 1.6% ACT 6.1% VIC 6.5% SA 12.8% -5% 0% 5% 10% 15% Source: DOE / Savills Research Top 20 Leases (by Area Leased) Tenant Property Date NLA (sq m) Type Rent Term Resolute Mining 15 William St Mar-17 1,235 Direct 520 (N) 7 Telstra 125 St Georges Tce Feb-17 3,316 Sublease n.a n.a Grant Thornton 152-158 St Georges Tce Feb-17 1,782 Direct 685 (N) 10 KPMG 235 St Georges Tce Dec-16 6,902 Renewal 675 (N) 10 Chevron 256 St Georges Tce Nov-16 3,029 Direct 425 (N) 2 Quadrant Energy (sitting tenant) 100 St Georges Tce Nov-16 7,081 Direct 615 (N) 13 Inpex (sitting tenant) 100 St Georges Tce Nov-16 13,379 Direct 660 (N) 10 Link Market Services 250 St Georges Tce Nov-16 3,166 Direct 685 (N) 11 Moray and Agnew 2 The Explanade Nov-16 1,092 Direct 695 (N) 5 Kott Gunning 140 St Georges Tce Oct-16 1,055 Renewal 515 (N) 5 RSL 66 St Georges Tce Sep-16 1,006 Direct 505 (N) 5 Gilbert & Tobin 123 St Georges Tce Sep-16 1,382 Direct 780 (N) 12 Allen & Overy (sitting tenant) 2 The Esplanade Sep-16 1,498 Direct 560 (N) 5 Holman Fenwick Willan 123 St Georges Tce Sep-16 1,168 Direct 800 (N) 10 Westpac 123 St Georges Tce Sep-16 6,300 Direct 650 (N) 10 AEMO 152-158 St Georges Tce Sep-16 1,725 Direct 695 (N) 10 Telstra 202 Pier St Sep-16 5,850 Direct 310 (N) 10 Kufpec 54-58 Mounts Bay Rd Sep-16 1,570 Sublease n.a 5 savills.com.au/research 05
Sales Activity In the 12 months to June 2017, Savills has identified approximately $262 million worth of office transactions (greater than $5 million) in the Perth CBD area. This is down from $798 million in the previous 12 months, and below the five year average of $732 million. Over the past 12 months, four properties were reported sold, down on the previous year of 13, and the five year average of nine. There were a number of significant investment opportunities presented at the tail-end of 2015 which heightened overall investment volumes through the first half of 2016. Investors, mostly off-shore groups and institutions, in their search for higher yielding assets (compared to other overseas markets) and Australia s safe-haven status buoyed much of this activity. While the last 12 months has been characterised by a lower volume of transactional activity, there are a number of large-scale institutional grade assets being tabled behind the scenes, driven to a large extent, by investor appetite for counter-cyclical investment opportunities. Significant sales in the last 12 months include, Westralia Plaza ($87m), Workzone East ($68.25m) and 109 St Georges Terrace has reportedly sold. In July 2016, Westralia Plaza sold to Zone Q, a Chinese property developer, for $87 million on a market yield of 7.13%. The sale followed the planned divestment of five direct property assets by the Insurance Commission of Western Australia (ICWA), including three A grade office buildings; The Forrest Centre at 219 and 221 St Georges Terrace, Westralia Square at 141 St Georges Terrace and Westralia Plaza at 167 St Georges Terrace. In, GDI Property Group announced that it had exchanged contracts to acquire Westralia Square, the final asset in the portfolio for $216.5 million with settlement due to occur in late October. Sales Activity by Price (Perth CBD) $1,800m $5m - $50m $50m - $100m >$100m $1,600m $1,400m $1,200m $1,000m $800m $600m $400m $200m $0m Source: DOE / Savills Research Vendor & Purchaser Type Vendors Purchasers 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other Yield Spread to Bond & IRR Perth CBD In January 2017, CorVal, a Sydney-based fund manager, finalised the acquisition of Workzone East, a fringe CBD A grade asset, from Charter Hall for $68.25 million, on a market yield of 7.66%. The building was originally marketed in 2016, however, at the time was not fully occupied. After new terms were secured in 2017, including a long-term lease to Telstra, the deal was renegotiated with CorVal. savills.com.au/research 06
Market yields in the Perth CBD, as at June 2017, are estimated to range between 6.75% and 8.25% for A grade buildings, and between 8.25% and 10.00% for secondary grade buildings. The average yield for A grade office buildings in the quarter to June 2017 is 7.50%, representing a 50 basis point firming over the year. Capital values have generally eased over three years to mid-2016, with some stabilisation being seen in the latter half of 2016. This was driven by a fall in effective rents as well as a rise in overall vacancy rates over the same period. Capital values in the Perth CBD, as at June 2017, are estimated to range from $8,500 per square metre to $12,500 per square metre for A grade buildings, and between $4,750 per square metre and $6,500 per square metre for Secondary grade (B grade) buildings. Recent yield compression in A grade assets has partially offset the drop in rents. Cap Value vs. Market Yield 12,000 Capital Value - PER CBD Market Yield (RHS) 10,000 8,000 6,000 4,000 2,000 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Top Sales Property Price ($m) Date NLA Yield Type $/sq m 109 St Georges Tce 71.77 Jun-17 13,980 7.25 e 5,167 Workzone East, 1 Nash St 68.25 Jan-17 12,362 7.66 e 5,521 Telstra Building, 80 Stirling St 35.00 Dec-16 19,775 n.a V 1,770 Westralia Plaza, 167 St Georges Tce 87.00 Jul-16 10,585 7.13 e 8,219 321 Murray St, Perth 12.60 Jun-16 1,237 n.a n.a 10,186 Exchange Tower, 2 The Esplanade (50%) 113.50 Mar-16 32,332 8.66 e 7,021 257 Adelaide Tce 19.50 Feb-16 484 n.a dev 40,289 Forrest Centre, 219-221 St Georges Tce 190.40 Feb-16 31,000 7.46 e 6,142 190 St Georges Tce 63.91 Feb-16 9,362 8.35 e 6,826 81 St Georges Tce 83.95 Jan-16 12,226 6.99 e 6,867 ; i = Initial, r = Reported, e = Equated, v = Vacant, dev = development savills.com.au/research 07
Supply There remains only one major office building under construction in the CBD Capital Square. The 55,000 square metre building, will be the new headquarters for Woodside Petroleum. Upon completion, Woodside will relocate from their existing building at 240 St Georges Terrace, leaving behind backfill space of approximately 46,000 square metres. While there are a few mooted projects in the pipeline, there is unlikely to be any speculative development in the short term. This may lengthen the period between the current cycle and the next, and encourage more refurbishment or repositioning of existing stock in the interim. Net Supply by Year 160,000 Historic Net Additions 15yr Avg 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - (20,000) (40,000) Savills Forecast / PCA Development The table below details the major upcoming and planned development projects in the Perth CBD. Building Address Dev Stage NLA Exp. Comp Precinct Tenants Capital Square, 98-124 Mounts Bay Rd UC 55,000 2018 West CBD Woodside QV3 North Tower, 250 St Georges Tce DA 20,565 2019 West CBD QV2 South Tower, 250 St Georges Tce DA 7,365 2019 West CBD Anzac House, 28 St Georges Tce DA 3,469 2019/2020 Mid CBD RSL Esplanade Busport, Mounts Bay Rd EP 17,001 2020 West CBD Elizabeth Quay Chevron Site, Lot 7 & 8 Mooted 52,355 2021+ Mid CBD Chevron (owner occupied) ; UC = Under Construction, EP = Early Planning, PS = Plans Submitted, PA = Plans Approved, DA = Development Approved savills.com.au/research 08
Rents As at June 2017, 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 no change in the year to June 2017. 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. Notwithstanding that incentive levels still vary greatly by building, 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. As at June 2017, net effective rents typically range from $315 to $380 per square metre per annum for Premium, and between $250 and $340 per square metre per annum for A grade, representing no change over the year. Net Effective Rents by Grade 900 Premium Grade A Grade B 800 700 600 500 400 300 200 100 - Net Face & Net Effective Rents (as at Jun-17) Net Face Net Effective Incentive (Net Basis % RHS) While the CBD market has re-based its rental indicators, a differential between the precincts and Prime and Secondary stock still exists. This dynamic is creating pockets of opportunity for tenants looking to tap into the increasingly competitive gap in the market to upgrade to higher quality prime space, at similar or in some cases, a lower cost than their existing tenancy. Outlook Expansion and new leases are a feature in the market. Expect to see a continuation of demand from education and legal sector, though this is likely to be concentrated in the Mid and West CBD precincts. This continued flight to quality may see the upper end of the market start to pull back on incentives, though, it will still be on a building by building basis. The market is unlikely to see a change in the short-to-medium term in regards to the supply pipeline. There are several projects, either with development approval or in early planning stage, however until the headline vacancy rate falls to within the 12-15% range, these projects are likely to remain mooted. There has been some confidence returning to the mining and resources sector off the back of a stabilisation in iron ore prices at the end of 2016 and a number of producers are looking at new project investments for 2017 as a result. In addition, the non-stop Perth to London flight from March 2018 bodes well for consumer and business confidence. Comparatively speaking, prime yields are still relatively high both on a global scale and in comparison to the eastern seaboard. On that basis, there is potential for further yield compression. There has been an increased focus on the Western Australia market from both domestic and offshore capital, chasing value-add / counter-cyclical opportunities. This trend is expected to remain elevated over 2017. savills.com.au/research 09
Perth CBD Key Indicators Perth CBD 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 ($/sq m) 600 725 475 650 250 475 Incentive Level Net 45% 50% 45% 50% 45% 55% Rental Net Effective ($/sq m) 315 380 250 340 125 240 Outgoings Operating ($/sq m) 115 125 95 120 95 110 Outgoings Statutory ($/sq m) 50 60 50 60 50 60 Outgoings Total ($/sq m) 165 185 145 180 145 170 Typical Lease Term 7 10 5 7 3 5 Yield Market (% Net Face Rental) 5.75 7.75 6.75 8.25 8.25 10.00 IRR (%) 7.25 8.00 7.50 8.50 7.75 9.00 Cars Permanent Reserved ($/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 6,750 9,000 4,750 6,500 NB: All rents equivalent to whole floor mid-rise Key State Office Contacts Research Katy Dean +61 (0) 8 9488 4140 kdean@savills.com.au Valuations Mark Foster-Key +61 (0) 8 9488 4145 mfosterkey@savills.com.au City & Metropolitan Sales Chas Moore +61 (0) 8 9488 4155 cmoore@savills.com.au Asset Management Jason Ridge +61 (0) 8 9488 4118 jridge@savills.com.au Capital Transactions Graham Postma +61 (0) 8 9488 4153 gpostma@savills.com.au Office Leasing Shelley Ritter +61 (0) 8 9488 4187 sritter@savills.com.au Project Management Graham Nash +61 (0) 8 6271 0306 gnash@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 Chris Freeman +61 (0) 2 8215 6093 cfreeman@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 10