Savills Research Briefing Parramatta Office Highlights The overall vacancy rate in Parramatta s office market fell further in December 2017 to 3.0% from 4.6% a year prior; Interest from local institutional investors was strong in the 12 months to September 2017, representing 92% of total sales activity; Average A Grade net effective rents increased by 17.0% in 2017 and average B Grade net effective rents grew by 17.9% over the same period; Pre-commitment activity on current developments suggest a re-casting of rents well past current levels, with new stock shifting the pendulum towards A Grade stock. A Grade Averages Latest Yr Change Outlook Rental N.F. ($/sq m) 500 +11.1% Incentives 17.5-425bps Rental N.E ($/sq m) 415 +16.9% Yield Market (%) 5.75-90bps IRR (%) 7.25-40bps Capital Values 9,300 +40.9% Demand & Supply Latest PCP* Vacancy 3.0 4.3 Net Absorb. ( 000 sq m) 7.5 32.1 Stock U/C ( 000 sq m) 129.5 - - % of market 18.3 - - % committed 100 - *PCP = Previous Corresponding Period
Report Contents Vacancy 3 Supply 3 Leasing Activity & Demand 4 Sales Activity 5 Rents 6 Outlook 7 Development Map 9 Key Indicators 10 Key Contacts 10 Senior Analyst Research Houssam Yakzan hyakzan@savills.com.au For our latest national reports, visit savills.com.au/research To join Savills Research mailing list, please email research@savills.com.au Executive Summary Parramatta continues to establish itself as Sydney second CBD, with most recent economic indicators placing it firmly as one of the top performing areas nationally. Based on analysis to track progress on Parramatta City Council s five-year Economic Development Plan, the Parramatta Local Government area outperformed the state and the nation across most key economic indicators, such as GDP growth, unemployment rate and employment growth. Aided by the strongest population growth numbers, a record infrastructure boom and increased public and private expenditure in the city is supporting an already strong office market. The Parramatta office market continues to identify itself as one of Australia s tightest markets, overall, with one of the lowest vacancy rates are just 3.0%, with no available space in current Prime grade office stock over the last 24 months. At the same time, all upcoming developments over this period have been fully pre-committed, providing no relief to Parramatta tenants. Looking past this, we are now seeing the beginning of a new development cycle with over 234,000 square metres of space expected to be delivered by 2020. The Parramatta office market continues to redefine itself as one of the strongest fringe markets in the country. The public sector has continued to drive leasing demand in Parramatta, accounting for 80% of total leasing activity, as government organisations decentralise from Sydney CBD to the West over much of 2016. Capitalising on strong forecast population growth and increased infrastructure spending by the state government further validates the notion of Parramatta becoming Sydney s second CBD. PCA Summary Table Parramatta (as at Dec-17) Prime Secondary Total AUS Non-CBD Total Stock ( 000) 299.6 405.8 705.4 7,273.3 Total Vacancy ( 000) 0.0 21.4 21.4 660.7 Vacancy (%) 0.0 (1.7) 5.3 (10.8) 3.0 (7.5) 9.1 (8.9) Net Absorption ( 000) 0.1 (10.9) 7.5 (-2.5) 7.5 (8.4) 11.5 (57.6) Net Absorption (%) 0.0 (4.6) 2.0 (-0.6) 1.1 (1.3) 0.2 (0.9) 23.9 Net Additions ( 000) 0.0 (10.3) -1.7 (-4.5) -1.7 (5.8) -36.5 (86.3) - Stock Additions ( 000) - - 1.1 102.5 - Stock Withdrawals ( 000) - 1.7 2.8 139.0 Net Additions (%) 0.0 (4.3) -0.4 (-1.0) -0.2 (0.9) -0.5 (1.3) (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 2
Vacancy The overall vacancy rate in Parramatta s office market fell further in December 2017 to 3.0% from 4.6% in the year prior, a level well below the 10 year average of 7.7%. Parramatta recorded the lowest prime grade vacancy in the country at 0% (as at December 2017) and only 2% available in secondary grade buildings, putting the balance of power squarely in favour of landlords. As a result, recorded growth in rents on both a net face and net effective basis was significant. Tenants seeking space in Parramatta are not left with many options but to move into very low grade buildings, renew leases within their existing space or find alternative space within other markets. There is no material relief in sight for tenants in Parramatta, though developments such as Parramatta Square may provide some offerings in the coming years. However, with pre-commitment activity in these developments high, this appears unlikely. CBA s exit from Parramatta in 2020/21 is projected as the most significant tenant migration out of the market, leading to possible respite for tenants. Historic Vacancy Net Supply by Year 16% Prime Secondary Total 14% 12% 10% 8% 6% 4% 2% 0% 200,000 Historic Net Additions Savills Forecast 15yr Avg 150,000 100,000 50,000 - (50,000) Source: PCA / Savills Research Supply Many new developers have entered the ring to help develop Parramatta into Sydney s second CBD. In particular, Scentre Group is refining its plans for a landmark office tower as it joins the rush of commercial landlords developing in the Parramatta. The concept is to span about 100,000 square metre of office space over 40 levels above the centre, and Scentre has already spoken to prospective tenants. In addition, DEXUS recently received local Council and Regional Planning Panel endorsement of a concept scheme for an office building at 140 George Street, Parramatta. Developer and investor Coombes Property Group and Drivas Property Group parties have also lodged a development application with the City of Parramatta Council to build a 23-storey 34,277 square metre building at 50 Macquarie Street and 220 Church Street, a 3685 sq m site the pair have owned for over 20 years. Further, the City of Parramatta Council has voted to allow developer Walker Corporation to put forward a commercial building option for the proposed 243-metre Aspire Tower at 8 Parramatta Square in the heart of the CBD. Councillors supported an option allowing Walker Corporation to explore a commercial tower instead of the planned residential and hotel building. The option comes with strict conditions including a new design competition, securing a pre-committed tenant for 50% of the building and maintaining the building s height and architectural presence as a key building. It is expected this will create a combined lettable area of 122,000 square metres, bringing the total commercial development in Parramatta Square to 250,000 square metres of prime A-grade office space. With current stock recorded at 705,416sqm, this new development represents 35% of the current market. savills.com.au/research 3
Leasing Activity & Demand In the 12 months to December 2017, 17,391 square metres of leasing activity was recorded in the Parramatta office market. This is up on down significantly on the 12 months prior (143,755 square metres), following record pre-commitment activity in 2016 on the Parramatta Square developments. The Government & Community Services sector continued to dominate leasing activity in Parramatta, accounting for 80% of total leasing activity. Notably, the largest lease of the year was RTA s 11,000 square metre renewal at 27 Argyle Street in July 2017. Over the past 12 months, net absorption in Parramatta was also largely development led following the completion of 1PSQ. 12 month net absorption was recorded at 7,539 square metres in December 2017, representing 1.1% of occupied stock, compared to national average of non- CBD office markets of 0.2%. Future absorption is expected to remain positive with the delivery of 105 Phillip Street (25,000 square metres), 3 Parramatta Square and 4 Parramatta Square (62,000 square metres and 40,000 square metres, respectively) delivering 127,500 square metres of occupied stock into the market by 2020. Leasing Activity by Size (> 500 square metres) 160,000 > 10,000sqm 5,000sqm - 10,000sqm <= 5,000sqm 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Leasing Activity by Tenant Type (> 500 square metres) Govt & Community - 79.8% Fin & Ins - 17.3% IT & Comm - 2.9% Recent Notable Leases (by Area Leased) Tenant Property Date NLA (sq m) Type Rent Term RTA 27 Argyle St, Parramatta, NSW Jul-17 10,924sqm Renewal 262 (N) 3 :Care 56 Station St, Parramatta, NSW May-17 2,954sqm Direct 380 (N) 5 HCF 75 George St, Parramatta, NSW May-17 1,888sqm Direct 450 (N) 6 Burbank 88 Phillip St, Parramatta, NSW Jun-17 1,115sqm Direct 420 (N) 7 S savills.com.au/research 4
Sales Savills recorded $376.1 million of investment activity (>$5 million) over the 12 months to December 2017, most of which was attributed to the sale of 105 Phillip Street, which was acquired by Charter Hall's Prime Office Fund and Direct Office Fund from DEXUS for $229 million in May 2017 on an initial yield of 5.31%. Totalling 25,000 square metres, the asset is fully leased to the NSW Government on a 12 year initial term. Whilst the first half of 2017 saw renewed interest in Parramatta s office assets, there were no sales recorded in the September quarter. However, the sale of 75 George Street, Parramatta in December 2017 helped to push overall sales volumes up. The sale of 75 George Street set a new record for a secondary building in Parramatta last year in terms of improved rate, transacting at approximately $8,988/sqm. CorVal sold the B-grade office building which it acquired in 2012 for $32.55 million for $86 million in December 2017. The building sits on a 2,668 square metre site with 9,568 square metres of net lettable area, and is currently fully-leased to five office tenants, two retail tenants and a car park operator, including St George Bank, HCF and UniSuper. Interest from local institutional investors was strong in the 12 months to December 2017, representing 92% of total sales activity. In addition to Parramatta s standout demographic drivers, this buoyant demand from local groups such as GPT and Charter Hall can be attributed to the increased appetite for long WALE assets and the ability to acquire assets that provided greater value add opportunities, as many buildings within Parramatta s CBD remain largely under developed. The only offshore acquisition in 2017 was the purchase of 80 George Street for $51.9 million to a Chinese private investor. Previously acquired by GDI Property Group for $38.7 million in May 2015, this sale is one representation of how favourable underlying fundamentals have underpinned investment performance in Parramatta. Average market yields in Parramatta as at December 2017, are typically estimated to range between 5.50% and 6.25% for Prime grade buildings and between 6.25% and 6.75% for Secondary grade buildings. With average capital values in Parramatta recorded at $9,300/square metres in December 2017, capital values experienced considerable uplift in 2017, increasing 41% over this period. Sales Activity by Size (Parramatta) $700m $5m - $50m $50m - $100m >$100m $600m $500m $400m $300m $200m $100m $0m Sales Activity by Purchaser Type Capital Values ($/sq m) vs. Market Yield 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Trust - $346m - 92.0% Owner Occupier - $30m - 8.0% Capital Value - Parramatta Market Yield (RHS) 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% savills.com.au/research 5
Recent Notable Sales (by Sales Price) Property Price ($m) Date NLA (sq m) Yield Type $/sq m 105 Phillip St, Parramatta 229.00 May-17 25,000 5.31 r 9,160 75 George St, Parramatta 86.30 Dec-17 9,654 5.50 r 8,939 93-95 Phillip St, Parramatta 30.80 Feb-17 2,439 n.a n.a 12,628 426 Church St, Parramatta 30.00 Jul-17 3,244 n.a n.a 9,248 ; r = reported yield; e = equated market yield; i = initial yield Rents Following continual falls in the overall vacancy rate in Parramatta s office market, coupled with an extended period of limited available supply, Parramatta s office market has provided its landlords with increasingly favourable leasing conditions, which have resulted in strong face rental growth for both the prime and secondary markets over the period. As at December 2017, A Grade net face rents typically ranged between $450 and $550 per square metre, growing, on average, by 11.1% over 2017. Growth in average net effective rents over the same period was even more pronounced, with average A Grade net effective rents increasing by 17.0% in 2017 and average B Grade net effective rents growing by 17.9% over the same period. However, anecdotal evidence suggests nets rents of over $550 per square metre have been achieved within Parramatta Square's pre-commitment market. With limited available supply due in 2018 and much of 2019, Savills Research forecast excellent rental future rental growth. Pre-commitment activity on current developments suggest a re-casting of rents well past current levels, with new stock shifting the pendulum towards A Grade stock. Net Effective Rents by Grade Net Face & Net Effective Rents (as at Dec 2017) 450 Grade A Grade B 400 350 300 250 600 500 400 Net Face Rent Net Effective Rent Net Incentive % - rhs 500 415 400 330 18.0 17.5 17.0 200 300 16.5 150 100 200 16.0 50-100 - Grade A Grade B 15.5 15.0 savills.com.au/research 6
PCA Summary Table by Precinct Parramatta (as at Dec-17) City East City North City South City West Mid City Parramatta (Total) Total Stock ( 000) 91.0 40.7 129.4 146.5 297.8 706.3 Total Vacancy ( 000) 8.2 2.4 2.2 2.7 5.9 30.0 Vacancy (%) 9.0 (7.4) 6.0 (12.2) 1.7 (9.4) 1.8 (6.0) 2.0 (6.7) 4.3 (7.7) Net Absorption ( 000) -3.2 (1.7) 1.6 (-0.2) 6.1 (0.3) 1.5 (1.2) 1.5 (5.3) 24.3 (11.8) Net Absorption (%)* -3.7 (2.4) 4.3 (-0.6) 5.0 (0.3) 1.1 (0.9) 0.5 (2.0) 3.7 (1.9) Net Additions ( 000) 0.0 (2.1) 0.0 (-0.5) 0.6 (-0.1) -0.8 (0.2) -1.6 (4.1) 23.9 (9.8) Stock Additions ( 000) 0 0 0.636 0 0.5 26 Stock Withdrawals ( 000) 0.0 0.0 0.0 0.8 2.1 2.1 Net Additions (%) 0.0 (2.7) 0.0 (-1.1) 0.5 (-0.1) -0.5 (0.1) -0.5 (1.5) 3.5 (1.5) Outlook Parramatta is expected to remain one of Australia s tightest office markets as falling vacancy rates coupled with withdrawals in surrounding fringe markets is anticipated to place additional upward pressure on rents over the short to medium term. This is exacerbated by withdrawals in surrounding fringe markets for alternate uses and/or demolition for upcoming infrastructure projects creating additional demand in Parramatta. The continued decentralisation of government tenants from Sydney CBD locations (e.g. Department of Education) is expected to drive much of Parramatta s leasing activity over the medium term, whilst also driving much of the demand for new supply. Inevitably, tenants will continue to look to markets such as Parramatta for quality and affordable office space. Most notably, the recent announcement by the NSW Government to reduce their presence in Sydney CBD, (targeting a 100,000 square metre reduction in office space by 2021) will drive demand for office space in the West as Parramatta continues to reposition itself as the new Government hub. Whilst the relocation of CBA out of Parramatta in 2020 (from 150 George Street - 21,964 square metres and 101 George Street - 18,066 square metres) would test any other fringe market, this move is likely to provide some much needed relief to existing tenants in search of alternative space. Looking further ahead, Parramatta as a CBD features heavily in the NSW Government's plan for Greater Sydney over the next two decades and is expected to play a vital role in Sydney s future economic landscape. Parramatta's future commercial viability is currently secured by planning policies and increased infrastructure investment. savills.com.au/research 7
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Development Map WESTMEAD ALBERT ST HAROLD ST LEGEND Mid City FENNELL ST GROSE ST East West North ROSS ST South PARRAMATTA CHURCH ST VICTORIA RD 1 O CONNELL ST MARSDEN ST GEORGE ST PHILLIP ST 4 MACQUARIE ST 2 SMITH ST 5 3 CAMPBELL ST HASSALL ST PARKES ST COWPER ST MARION ST HARRIS PARK Building Address Dev Stage NLA Exp. Comp Tenant 1 2 3 4 5 105 Phillip Street UC 25,000 2018 Dept of Education 153 Macquarie Street (3PSQ) UC 46,000 2019 NAB 30 Darcy Street (4PSQ & 6PSQ) UC 110,000 2019 NSW Government 93-95 Phillip Street and 32 Smith Street DA 28,000 Mooted - 159-175 Church Street DA 35,000 Mooted - savills.com.au/research 09
Parramatta Key Indicators (Q4-17) A Grade B Grade Low High Low High Rental Gross Face ($/sq m) 565 665 495 545 Rental Net Face ($/sq m) 450 550 375 425 Incentive Level Net 15 20 15 20 Rental Net Effective ($/sq m) 370 455 310 350 Outgoings Operating ($/sq m) 75 80 80 85 Outgoings Statutory ($/sq m) 30 40 30 40 Outgoings Total ($/sq m) 105 120 110 125 Typical Lease Term 3 7 3 7 Yield Market (% Net Face Rental) 5.50 6.00 6.25 6.75 IRR (%) 7.00 7.50 7.50 8.00 Cars Permanent Reserved ($/pcm) 270 320 225 275 Cars Permanent ($/pcm) 200 250 200 250 Office Capital Values ($/sq m) 8,500 10,000 6,000 8,000 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 Andrew Pannifex +61 (0) 2 8215 6006 apannifex@savills.com.au Capital Transactions Graeme Russell +61 (0) 2 8215 8947 grussell@savills.com.au Metro & Regional Sales Robert Lowe +61 (0) 2 8215 8841 rlowe@savills.com.au Office Leasing Rob Dickins +61 (0) 2 8215 8833 rdickins@savills.com.au Asset Management Adele Eagleton +61 (0) 2 8215 6069 aeagleton@savills.com.au Project Management Gavin Boswarva +61 (0) 2 8215 8935 gboswarva@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