Savills Research Queensland Briefing Brisbane CBD Office Highlights A turnaround has become evident in Brisbane with absorption of prime grade stock leading the nation and double digit growth evident in effective rentals; Renewed interest in Brisbane CBD assets in conjunction with the current low interest rate environment saw prime yields tighten further in the year to June 2017; After significant net supply over 2016, a muted supply pipeline over the next 3 years is likely to pique investor interest in the Brisbane CBD office market; An upturn in demand drivers is evident with rising commodity prices, increasing net migration and a lower AUD, all of which are likely to provide a boost to the Queensland economy A Grade Averages Latest 12mo Diff Outlook Rental N.F ($/sq m) 540 +10.2% Net Incentives (%) 46.0-100bps Rental N.E ($/sq m) 290 +11.5% Yield Market (%) 6.65-25bps IRR (%) 8.00-15bps Capital Values ($/sq m) 9,000 +12.5% Demand & Supply Latest PCP* Vacancy (%) 15.7 16.9 Net Absorb. ( 000 sq m) 41.7 43.2 Stock U/C ( 000 sq m) 47.7 75.9 - % of market 2.1 3.4 - % committed *PCP = Previous Corresponding Period
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 Looking at the significant change in the Brisbane CBD story over the last 10 years provides a good explanation of current market conditions and dynamics. 10 years ago when Brisbane s vacancy rate sat close to 1%, rents were at record highs and tenants de-centralised from the market due to both cost and a lack of options; which subsequently led to a strong oversupply from developers. This, coupled with a mining and government contraction led vacancy rates to rise dramatically, now sitting close to a record high of 15.7%. Now however, with tenants re-centralising given reduced effective rentals Brisbane has shown the strongest prime grade absorption in the country at almost 112,000 square metre, or 11.7% of occupied stock it is clear this narrative has reversed. Following a year of materially high net supply coming onto the market in 2016, the Brisbane CBD appears to be at a point where recovery is evident. Not only is stock under construction limited over the next 3 years (representing 2.0% of current stock in Brisbane CBD compared to 3.4% a year ago), demand drivers are much stronger than they were 12 months ago, with higher commodity prices, a lower AUD, increasing export revenues and rising net migration likely to provide a material boost to the Queensland economy. In addition, with construction beginning on Queens Wharf and Howard Smith Wharf and continuing on Brisbane Quarter, investors are seeing the Brisbane story start to come alive. Restrained rental growth has seen a trend towards re-centralisation in the CBD, with former fringe tenants relocating to the CBD. This is clearly evidenced by a pickup in investment activity over the last 12 months, after muted sales transactions over FY-16. With a notable spread still evident between Brisbane CBD and Sydney and Melbourne CBDs, Brisbane CBD is proving to be an attractive alternative with investors. Over the last year, domestic investors have been considerably more active in Brisbane s CBD (accounting for over 60% of all acquisitions over this period), realising the significant capital value discount to Sydney. PCA Summary Table Brisbane CBD (as at Jun-17) Premium A Grade Prime Secondary Total AUS CBD Total Stock ( 000) 335.5 918.3 1,253.8 1,025.9 2,279.7 18,018.7 Total Vacancy ( 000) 39.5 106.9 146.3 211.2 357.5 1,772.9 Vacancy (%) 11.8 (8.0) 11.6 (8.4) 11.7 (8.4) 20.6 (13.2) 15.7 (10.8) 10.5 (8.6) Net Absorption ( 000) 91.2 (15.6) 20.6 (22.0) 111.8 (37.6) -70.0 (-19.3) 41.7 (18.3) 188.1 (199.0) Net Absorption (%)* 44.5 (7.8) 2.6 (3.2) 11.2 (4.2) -7.9 (-2.1) 2.2 (1.0) 1.2 (1.3) Net Additions ( 000) 75.9 (19.5) 0.0 (31.7) 75.9 (51.2) -58.0 (.8) 17.8 (52.1) 125.5 (325.6) Stock Additions ( 000) 75.9 75.9 75.9 495.7 Stock Withdrawals ( 000) 0.0 0.0 0.0 58.0 58.0 376.4 Net Additions (%) 29.2 (9.1) 0.0 (4.3) 6.4 (5.4) -5.4 (0.1) 0.8 (2.6) 0.7 (2.0) Source: PCA / Savills Research (10yr Averages shown in brackets); * As a percentage of occupied stock NB: Secondary Rents shown are for B Grade; All rents equivalent to whole floor mid-rise savills.com.au/research 02
Vacancy Positive levels of absorption and strengthening tenant demand led to vacancy rates trending down in prime stock. Whilst there was a slight uptick in the total vacancy rate from the start of 2017, Premium and Grade A vacancies fell to their lowest levels in over a year. A flight to quality by tenants caused secondary vacancy rates to rise to a record high in the June quarter, partially due to stock withdrawals displacing tenants into prime grade assets. Savills Research anticipates continual declines in vacancy for the Brisbane CBD over 2017 and 2018 with continued recentralisation and limited upcoming supply in these years. Additional supply in 2017 will be limited to the return of the refurbished 310 Ann Street and only the DA approved 300 George Street (with expected completion after 2019) the only new development currently on the horizon. Historic Vacancy Rate Full Floor Availability by Period 25% Prime Secondary Total 60 Premium (No of Floors) A Grade (No of Floors) 20% 50 15% 40 10% 30 20 5% 10 0% 0 In 6 Mths 6-12 Mths 1-2 Yrs > 2 Years Source: PCA / Savills Research Full Floor Availability The Savills Prime Full Floor Availability Report assesses the state of the leasing market in a different manner to standard vacancy surveys. The report shows each Premium and A Grade building in the city on a floor-by-floor basis highlighting which floors are available for lease, now and in the near future, including those under construction and refurbishment. The Brisbane CBD office market currently has a total of 263,729sqm available across 276 floors. This represents a total of 13.3% of full floors available to the market. Premium grade buildings currently have the least full floors available, with 27 full floors available to market. Grade A offices have 86 full floors available and 163 full floors are available in the Grade B sector. By Grade By Precinct Premium A Grade B Grade Financial Uptown Govt. Retail Legal Total Prime Floors (No) 170 810 897 602 498 376 203 198 Total Prime NLA (sq m) 260,451 974,820 741,804 644,021 473,968 400,960 207,619 250,507 Prime Floors Available (No) 27 86 163 88 90 34 13 51 Prime Full Floor Avail. (sq m) 45,643 95,374 122,712 99,788 83,558 21,722 9,263 49,398 Prime Full Floor Avail. (%) 17.5% 9.8% 16.5% 15.5% 17.6% 5.4% 4.5% 19.7% Max Contiguous Floors (No) 3 15 17 9 15 17 3 12 Max Contiguous Area (sq m) 8,364 14,063 12,163 8,533 14,063 9,747 1,905 12,673 savills.com.au/research 03
Leasing Activity & Demand In the 12 months to June 2017 Savills identified 149,949 square metres of leasing activity in Brisbane CBD. This is up 3.6% on the 12 months prior and 14% on the 10 year average (131,432 square metres). The majority of these leases (approximately 39% of total space) occurred in the Legal precinct, largely due to Telstra renewing their lease in 275 George Street (28,464 square metres) and Northbank Plaza (10,665 square metres). Looking at leasing volume by grade, Grade A leases were the most numerous with 121,174 square metres leased over the year to June 2017. Renewal leases (86,501sq m) accounted for the majority of office space leased, comprising 58% of the market whilst Direct leases (44,535sq m) accounted for 30% of the total market. Of the total area leased in Brisbane CBD over the last 12 months, the IT & Communications sector was the most dominant, leasing 26% of total stock, from 3 transactions, followed closely by the Mining sector (23% of total stock leased, from 5 transactions). The largest number of transactions was through the Property & Business Services sector, which accounted for 22 transactions making up 7% of total leases (10,581sq m). Similarly, Finance & Insurance companies transacted 22 deals, making up 20% of total leases over the year to Jun-17. Whilst the Government & Community sector held the largest market share 6 months ago (at 35%), with the completion of 1 William Street, they have been less active, though a growing Education sector (a sub-sector of Government & Community) was still active in the first half of 2017. Positive professional job advertisement numbers over the last 2 years, a forward looking indicator for office net absorption, have clearly translated into positive net absorption for the Brisbane CBD market over the last 12 months. However, whilst it would be prudent to assume falling net absorption in the coming year, on the back of negative professional job advertisements for the last 2 quarters, we are coming off a large base. In addition, continued recentralisation into the CBD (away from Fringe markets) and comparatively low rents means that the Brisbane CBD remains an attractive option for tenants. Leasing Activity by Precinct (> 1,000sq m) 250,000 Financial Government Legal Retail Uptown 200,000 150,000 100,000 50,000 - Leasing Activity by Tenant Type (> 1,000sq m) IT & Comm - 26.1% Mining - 22.9% Fin & Ins - 19.5% Govt & Community - 13.6% Undisclosed - 10.9% Prop & Bus Serv - 7.1% Rec Serv - 0.0% Net Absorption vs. Job Ads 150,000 Annual Net Abs. - BRI CBD Prof. Job Ads - QLD 100,000 50,000 - (50,000) (100,000) (150,000) 40% 20% 0% (20%) (40%) (60%) Source: DOE / Savills Research savills.com.au/research 04
As noted before, although growth in professional job advertisements was the lowest of all states, this is coming off a relatively large base. Other economic indicators point to a pickup in professional job ads over the remainder of 2017, with State Final Demand in QLD back near the 10yr average in March 2017, a solid improvement on previous quarters. In addition, an increase in mining investments, a boost in export revenues from completed projects as well as positive net migration are all likely to boost the Queensland economy with this translating to a possible increase in demand for space from mining companies. Given the Mining sector was the second most active sector in the Brisbane s leasing market, this should translate to an increase in overall leasing activity for the remainder of 2017. Professional Job Advertisement 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 Telstra 275 George St Jan-17 28,464 Renewal n.a 8 Suncorp Metway 266 George St Oct-16 23,527 Renewal n.a 5 Origin Energy 172-180 Ann St Mar-17 16,350 Direct 765 (G) 17 Santos 32 Turbot St Aug-16 14,436 Renewal 725 (G) 10 Telstra 69 Ann St Jan-17 10,665 Renewal n.a 8 Westpac 260 Queen St Dec-16 5,668 Renewal n.a 5 Department of Housing and Public Works TBC 60 Albert St Jul-16 4,727 Direct 665 (G) 8 Stanwell Corporation 172-180 Ann St Apr-17 3,500 Direct n.a n.a. Queensland Treasury Corporation (QTC) 111 Eagle St Feb-17 2,832 Sublease 875 (G) 8 Times Education Group Australia 316 Adelaide St Mar-17 2,500 Direct 535 (G) 7 Ray White Group 111 Eagle St Apr-17 2,357 Renewal n.a 5 Department of Births, Deaths & Marraiges 172-180 Ann St Aug-16 2,200 Direct 775 (G) 8 Arcadis 120 Edward St Feb-17 1,625 Direct 570 (G) 5 Department of Housing and Public Works 60 Albert St Jul-16 1,493 Sublease 385 (G) 3 Department of Natural Resources & Mines 400 George St Aug-16 1,460 Direct 760 (G) 5 Conrad Gargett Architecture 400 George St Aug-16 1,460 Renewal 790 (G) 5 Newcrest Mining 400 George St Aug-16 1,456 Sublease n.a 3 Wotten Kearney 111 Eagle St Oct-16 1,432 Sublease 420 (G) 3 ILSC Language Schools 232 Adelaide St Nov-16 1,384 Renewal n.a 7 National Storage 71 Eagle St Sep-16 1,207 Sublease 400 (G) 3 savills.com.au/research 05
Sales Activity After muted investment activity in the last financial year, there has been a rebound in the past 12 months as relative pricing (especially compared to Sydney and Melbourne) proves to be a draw card for foreign and domestic investors alike. In spite of high vacancy rates and a challenging market, investors are identifying a turning point in the Brisbane CBD market, with projections of an upturn. Investors are further attracted by the limited supply due to hit the market over the next 2-3 years, which in turn is likely to drive rental and capital value growth over the short to medium term. Savills recorded approximately $1.25 billion of Brisbane CBD transactions in the 12 months to June 2017. This is up 34% from $0.93 billion in the previous 12 months and down on the 5 year average of $1.36 billion. There was a rebound in domestic investors in FY-17, accounting for 62% of all buyers (compared to 21% last financial year), on the back of increased activity from domestic Funds. Funds transacted $572.7 million in total sales over this period. Notably, the purchase of an additional one-third of 111 Eagle Street for $284.2 million by GPT s Wholesale Office Fund at an equated yield of 5.50%, saw the fund increase its ownership of the building to two-thirds. In addition, Charter Hall and Investa s co-investment in 366, 370 and 380 Queen Street shows increased interest in the CBD for development purposes. Interestingly, whilst investor interest from Asian countries remains strong in Australia, it appears that they are more focused in Melbourne and Sydney, with no investors of Asian origin investing in Brisbane CBD over the year to June 2017. Market valuation yields in Brisbane CBD, as at June 2017, are typically estimated to range from 5.75% to 6.25% for Premium grade buildings and 7.50% to 8.25% for B Grade buildings. The average yield for Brisbane CBD office buildings pointed to a 25 basis point firming over the last year. There remains a notable spread between Brisbane CBD and Sydney CBD yields. Indicators show there is likely now greater scope for contraction in Brisbane, despite the historically high volatility in its investment returns, as a result of the lower for longer outlook for interest rates and long-term bond rates in conjunction with a positive outlook on leasing activity. Sales Activity by Price (Brisbane CBD) $2,500m $5m - $50m $50m - $100m >$100m $2,000m $1,500m $1,000m $500m $0m Source: DOE / Savills Research Vendor & Purchaser Type Vendors Purchasers 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other Yield Spread to Bond & IRR Brisbane CBD 12% 10yr Bond Rate Average Brisbane CBD (Grade A Yield) Average Brisbane CBD (Grade A IRR) 10% 8% 6% 4% 2% % savills.com.au/research 06
Given the significant difference in capital values between Brisbane CBD and Sydney CBD, renewed interest in Brisbane is likely over the short to medium term, particularly as a diminishing level of supply and strengthening demand create a positive tenancy outlook. As work begins on the Queens Wharf and Howard Smith Wharf construction projects, investors have seen the Brisbane story start to come alive. Investor interest from foreign investors in particular is likely to help boost investment activity in Brisbane CBD as focus moves away from the Southern cities to more affordable options. In this sense, Brisbane CBD provides an attractive alternative, with commentary suggesting a floor has been reached for rents. Cap Value vs. Market Yield 12,000 Capital Value - BRI CBD Market Yield (RHS) 10,000 8,000 6,000 4,000 2,000 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% Top 20 Sales Property Price ($m) Date NLA Yield Type $/sq m One One One (33%) Eagle Street, Brisbane 284.20 Dec-16 63,800 5.50 e 13,364 307 Queen Street, Brisbane 153.00 Nov-16 19,418 7.14 e 7,879 State Law Bldg, 50 Ann Street, Brisbane 144.62 Jan-17 25,519 8.23 e 5,667 120 Edward Street, Brisbane 142.65 Jun-17 15,271 6.15 e 9,341 324 Queen Street, Brisbane 132.00 Oct-16 19,874 7.66 e 6,642 545 Queen Street, Brisbane 70.50 May-17 13,581 8.87 e 5,191 Health & Forestry House, 147-163 Charlotte Street, 70.00 Apr-17 26,782 n.a n.a 2,614 40 Tank Street, Brisbane 56.10 Apr-17 6,218 6.16 e 9,022 IBM Building, 348 Edward Street, Brisbane 49.00 Nov-16 11,484 8.53 e 4,267 126 Margaret Street, Brisbane 34.00 Dec-16 5,569 7.52 e 6,105 370 Queen Street, Brisbane 23.50 Jun-17 3,831 n.a dev 6,134 380 Queen Street, Brisbane 23.00 Jun-17 4,246 n.a dev 5,417 366 Queen Street, Brisbane 7.25 Jun-17 1,257 n.a dev 5,768 41 Edward Street, Brisbane 4.52 Jun-17 550 n.a v 8,225 ; i = Initial, r = Reported, e = Equated, v = Vacant, dev = development savills.com.au/research 07
Supply Development activity in Brisbane CBD was materially above trend in 2016 with over 122,000 square metres of new additions, including 1 William Street and 180 Ann Street. After this burst, development activity will be muted over coming years as illustrated in the adjoining chart. Only the refurbishment of 310 Ann Street is due for completion in 2017 (18,450 square metres) in Brisbane CBD s Uptown precinct with nothing due in 2018. Beyond that, only the 47,700 square metre development of 300 George Street, which is due for completion in 2020 is currently under construction. The high level of development activity in Brisbane CBD has been a key reason for stagnant rental growth. Limited upcoming supply is likely to help rental and capital value growth over the short to medium term. Net Supply by Year 140,000 Historic Net Additions Savills Forecast 120,000 15yr Avg 100,000 80,000 60,000 40,000 20,000 - (20,000) (40,000) (60,000) / PCA Development The table below details the major upcoming and planned development projects in the Brisbane CBD. Building Address Dev Stage NLA Exp. Comp Precinct Tenants 310 Ann Street UC 18,450 2017 Uptown Allianz 261 Queen St DA 1,046 2019 Financial 320 George St DA 9,060 2019 Legal 366-380 Queen Street EP 45,000 2020 Financial 300 George Street UC 47,700 2020 Legal Q Super Regent Tower (150 Elizabeth Street) Mooted 35,000 2021+ Retail 62-80 Ann Street EP 55,000 2021+ Legal savills.com.au/research 08
Rents After years of stagnant rental growth in Brisbane CBD over the last 5 years, a turnaround is evident with average Grade A net face rents growing 10.2% over the year to June 2017. This is the second highest growth rate nationally with growth in average Grade A net effective rents (11.5% over the same period) slightly higher as a result of falling incentives. An environment of strengthening demand coupled with a limited supply pipeline, is likely to push rents higher over the next 2-3 years. Similarly, rents in Brisbane CBD s secondary market were on the rise with growth in average Grade B net face rents of 8.9% over the year to June 2017. Sharper falls in incentive levels (compressing 300 basis points) led to a more pronounced increase in average Grade B net effective rents, which grew by 16.7% over the same period. A notable trend of re-centralisation is prevalent with former fringe tenants looking to relocate to the CBD, as evidenced by Origin Energy at 180 Ann Street and Allianz rumoured to be moving down the road at 310 Ann Street. Given the muted supply pipeline over the next 3 years, rental rates are expected to creep upwards as vacancy tightens. 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) 800 Net Face Net Effective Incentive (Net Basis % RHS) 700 600 500 400 300 200 100 60.0 50.0 40.0 30.0 20.0 10.0 0 Premium A Grade Secondary 0.0 Outlook A turnaround in Brisbane CBD is evident as the current development cycle comes to a close. Whilst falling mining investments and a struggling economy over the last 5 years in Brisbane CBD kept a cap on rental and capital value growth rates, current indicators suggest a floor has been reached. As a result there is renewed investor interest in Brisbane CBD as both domestic and offshore buyers focus their attention north of Sydney and Melbourne in search of better yields and total returns, despite historic volatility. A pickup in the state economy is further evident with the depreciation of the AUD boosting the tourism economy and rising commodity prices and strong population growth likely to translate to stronger demand. This in conjunction with a limited supply pipeline over the next 3 years tells a more positive story from both an investment and tenancy perspective. The Brisbane sales market has seen a flight of capital enter from both domestic and foreign investors, mindful of the now significant capital value discount to Sydney. With a notable spread between Brisbane CBD and Sydney CBD evident, current market conditions point to more room for tightening in Brisbane CBD. Savills Research anticipates further tightening of capitalisation rates as interstate and global players seek to take advantage of the yield arbitrage compared to Southern cities. Rental rates are expected to creep upwards as vacancy rates tighten as a result of limited supply due to hit the market over the short term, although challenging conditions in Brisbane s Fringe market will likely temper the speed of this recovery. savills.com.au/research 09
Brisbane CBD Key Indicators Sydney CBD Premium A Grade B Grade Low High Low High Low High Rental Gross Face ($/sq m) 795 900 625 750 545 605 Rental Net Face ($/sq m) 635 740 475 600 400 460 Incentive Level Net 30% 38% 32% 40% 35% 42% Rental Net Effective ($/sq m) 365 435 250 330 190 225 Outgoings Operating ($/sq m) 70 120 70 100 75 90 Outgoings Statutory ($/sq m) 55 75 55 75 50 75 Outgoings Total ($/sq m) 125 195 125 175 125 165 Typical Lease Term 7 10 4 10 3 8 Yield Market (% Net Face Rental) 5.75 6.25 6.00 7.25 7.50 8.25 IRR (%) 7.50 8.00 7.50 8.50 8.25 9.50 Cars Permanent Reserved ($/pcm) 500 850 450 650 350 550 Cars Permanent ($/pcm) 450 650 400 550 300 500 Office Capital Values ($/sq m) 10,750 13,500 7,000 11,000 4,500 7,000 NB: All rents equivalent to whole floor mid-rise Key State Contacts Research Shrabastee Mallik +61 (0) 2 8215 8856 smallik@savills.com.au Research Houssam Yakzan +61 (0) 2 8215 8980 hyakzan@savills.com.au Valuations Brett Schultz +61 (0) 7 3002 8855 bschultz@savills.com.au Capital Transactions Peter Chapple +61 (0) 7 3002 8858 pchapple@savills.com.au Metro & Regional Sales Robert Dunne +61 (0) 7 3002 8806 rdunne@savills.com.au Office Leasing John McDonald +61 (0) 7 3002 8847 jmcdonald@savills.com.au Asset Management Chris Ainsworth +61 (0) 7 3002 8831 cainsworth@savills.com.au Project Management Ken Ng +61 (0) 7 3018 6705 kng@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