Savills Research Briefing Brisbane Fringe Office Highlights The Queensland economy continues to show strong signs of recovery, with economic growth for the state recorded at 3.0% over the year to September 2017, above the national average; The Inner South precinct had the lowest vacancy rate of all the precincts, at 10.3%, as at December 2017; Brisbane s Fringe market recorded its highest ever year of sales transactions, with Savills Research recording $1.05 billion of office sales in 2017; In 2017, foreign investors were the most active purchaser type, accounting for 49% of all buyers. A Grade Averages Latest Yr Change Outlook Rental N.F. ($/sq m) 445 +3.5% Incentives - Gross (%) 37.0 +100bps Rental N.E ($/sq m) 240 +4.3% Yield Market (%) 6.50-40bps IRR (%) 8.00-15bps Demand & Supply Latest PCP* Vacancy 14.1 13.0 Net Absorb. ( 000 sq m) -37.9 22.1 Stock U/C ( 000 sq m) 21.6 - % of market 1.8 - % committed 78 *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 Shrabastee Mallik smallik@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 The Queensland economy continues to show strong signs of recovery, with economic growth for the state recorded at 3.0% over the year to September 2017, above the national average. A resurgence in the mining sector was evident with corporate profits for the mining sector up 66.1% over the same period. There are signs of improving consumer and business sentiments as there are positive spill over effects into the rest of the Queensland economy, with a 40% increase in the number of engineering jobs advertised in Queensland in 2017. These forward looking indicators all point to a recovery in leasing demand in not only Brisbane s CBD office market, but also in the Brisbane Fringe office market. Whilst the Brisbane Fringe office market has been largely characterised by a major expansion period over the last decade, with total stock growing nearly 50% over this period, we are now seeing withdrawals for other uses. In the 6 months to December 2017, 15,000 square metres of stock was withdrawn from Brisbane s fringe markets for conversion to retail, residential and student accommodation. With the availability of more affordable options in rejuvenated precincts (particularly in the Urban Renewal precinct), the overall vacancy rate in Brisbane s Fringe market sits below that of the CBD at 14.1%. However, with incentives moving higher in the CBD, tenants are now being drawn back to the CBD, supported by anecdotal evidence suggesting firms are more eager to recentralise. Brisbane s Fringe market recorded its highest ever year of sales transactions, with Savills Research recording $1.05 billion of office sales in 2017. Yields continued to tighten as demand for core quality assets remained strong, with investors identifying more affordable options in Brisbane s Fringe market. PCA Summary Table Brisbane Fringe (as at Dec-17) Prime Secondary Total Aus Non-CBD Total Stock ( 000) 659.7 543.7 1,203.4 7,273.3 Total Vacancy ( 000) 88.6 80.9 169.4 660.7 Vacancy (%) 13.4 (8.5) 14.9 (13.3) 14.1 (11.0) 9.1 (8.9) Net Absorption ( 000) -15.9 (31.5) -22.0 (-10.1) -37.9 (21.4) 11.5 (57.6) Net Absorption (%)* -2.7 (8.4) -4.5 (-2.0) -3.5 (2.4) 0.2 (0.9) Net Additions ( 000) 0.0 (40.2) -28.0 (-3.6) -28.0 (36.7) -36.5 (86.3) Stock Additions ( 000) - - - 102.5 Stock Withdrawals ( 000) 0.0 11.8 28.0 139.0 Net Additions (%) 0.0 (9.9) -4.9 (-0.6) -2.3 (3.7) -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 *As a percentage of occupied stock; **As a percentage of total stock savills.com.au/research 2
Vacancy Over the 12 months to December 2017, there was a slight uptick in the total vacancy rate in the Brisbane Fringe office market, with the overall vacancy rate rising to 14.1% from 13.0% a year prior. However, it is important to note that vacancy rates remain below that of the neighbouring CBD as tenants remain on the lookout for more affordable options in quality stock. The Inner South precinct had the lowest vacancy rate at 10.3%. Whilst rents remain lower in Brisbane Fringe, we are seeing a turnaround with higher incentives in the CBD drawing tenants away. With only the fully committed 900 Ann Street and the mostly pre-committed 25 King Street in Fortitude Valley, due in 2018, Savills Research anticipates vacancy rates to trend downwards over the next 2 years until 2020/21, when close to 74,000 square metres of stock is due to hit the market. Historic Vacancy by Grade 20% Prime Secondary Total 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Historic Vacancy by Precinct 24% 20% 16% 12% 8% 4% 0% Inner Sth Milton Spring Hill Toowong Urban Renewal Source: PCA / Savills Research Source: PCA / Savills Research Supply With a major expansion phase in developments now complete in the Brisbane Fringe office market, there will be a lull in construction activity over the next 2 years. Withdrawals over the last 12 months in the secondary market have been largely associated with refurbishment of existing stock and conversions to residential and hotel projects (e.g. 67 St Pauls Terrace in Spring Hill). We will see a new wave of supply in the 2020/21 period, though most of these projects are subject to pre-commitments being met before construction is likely to begin. The limited supply pipeline in Brisbane Fringe till then will boost market fundamentals aiding rental growth and driving vacancy rates down. savills.com.au/research 3
Leasing Activity & Demand In the 12 months to December 2017, Savills Research recorded 76,735 square metres of leasing activity (over 500 square metres). This is down 19% on the 12 months prior and down 14% on the 10 year average, largely as a result of tenants being driven back to the CBD. The majority of these leases (approximately 73% of total leases) occurred in the Urban Renewal precinct. The Government & Community sector continued to dominate the Brisbane Fringe office leasing market, accounting for 45% of total leases, followed by the Mining sector (15%). The largest recorded lease in 2017 was from the Mining sector, with Aurecon pre-committing to 6,500 square metres of space in 25 King Street, Bowen Hills in October 2017. The Government & Community sector was responsible for the second largest recorded lease, with International Education Services (IES) signing a lease for 6,000 square metres of space in 433 Boundary Street, Spring Hill. Negative net absorption remains a feature of the Brisbane Fringe office market, with 12 month net absorption recorded at -37,900 square metres in December 2017. However, with business and consumer sentiment (as captured by NAB) now at their highest level since the GFC, we can expect a turnaround in demand fundamentals. Supporting this, there has been a turnaround in labour market indicators, with growth in professional job advertisements recorded at 6.2% over the year to December 2017. Employment growth was above the 5 year average in Queensland in the latter half of the year and major mining project completions will likely see a positive spill over effect on leasing demand in 2018/19. Leasing Activity by Precinct (> 500 square metres) 160,000 Inner Sth Milton Spring Hill Toowong Urban Renewal 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - Leasing Activity by Tenant Type (> 500 square metres) Govt & Community - 45.2% Undisclosed - 16.3% Mining - 15.2% Rec Serv - 7.1% IT & Comm - 6.0% Prop & Bus Serv - 5.8% W'Sale & Retail - 4.4% Recent Notable Leases (by Area Leased) Tenant Property Date NLA Type Rent Term Aurecon 5 King Street, Bowen Hills Oct-17 6,489 Precom 590 (N) 10 International Education Services 433 Boundary Street, Spring Hill Dec-17 6,000 Direct 485-515 (G) 12 State of Queensland (ehealth) 100 Wickham St, Fortitude Valley Jan-17 4,980 Renewal 525 (G) 6 State Government 108 Wickham St, Fortitude Valley Mar-17 4,570 Direct 590 (G) 7 State of Queensland 153 Campbell Street, Bowen Hills Aug-17 2,873 Direct 440 (G) 5 Siemens 153 Campbell Street, Bowen Hills Aug-17 2,668 Renewal 465 (G) 3 CoCo Republic 400 Wickham Street, Fortitude Valley Aug-17 2,652 Renewal 377 (N) 10 Dept of Housing & Public Works 108 Wickham Street, Fortitude Valley Nov-17 2,270 Direct 590 (G) 7 RPS 520 Wickham St, Fortitude Valley Nov-17 2,226 Direct 600 (G) 6 savills.com.au/research 4
Sales Sales Activity by Price (>$5 million) $1,200m $5m - $50m $50m - $100m >$100m Savills Research recorded $1.05 billion of Brisbane Fringe transactions over the 12 months to December 2017, the highest ever on record. There was an increase in offshore capital, compared to the 12 months prior, as foreign investors turned their attention north of the highly competitive Sydney and Melbourne office markets. With forward looking indicators largely positive and a turnaround across key economic indicators evident, it appears that investors are increasingly recognising the counter-cyclical opportunity investing in Brisbane s office markets represent at the moment. In 2017, foreign investors were the most active purchaser type, accounting for 49% of all buyers, compared to 19% in 2016 and 0% in 2015. Notably, South Korea s Teachers Pension Fund was responsible for the largest transaction of the year, purchasing 505 St Paul s Terrace (Green Square South Tower), Fortitude Valley for $205.5 million at an equated yield of 5.87% in January 2017. This sale also set a capital value record in Brisbane s fringe market, with a capital value per square metres of $11,664. Local institutional investors were the second most dominant purchaser type, with Funds accounting for 35% of all buyers in 2017. Local fund, Impact Investment Group purchased 25 King Street for $139.1 million at an equated yield of 6.14% in January 2017. The evidence from sales activity in the 12 months to December 2017 suggests that yield compression has also taken hold in the Fringe market. Notably, the sale of Green Square South Tower represented an equated yield on 5.87% and the sale of HQ South represented an equated yield of 6.18% in June 2017. As in the CBD market, foreign and interstate investors have taken note of the yield differential to Southern cities and are now considering Brisbane Fringe as a genuine investment alternative. Capital values in Brisbane Fringe remained marginally below that of the neighbouring CBD, indicative of a greater appetite for quality prime assets regardless of location. Whilst capital values in Brisbane Fringe have remained largely unchanged over the last 18 months, renewed interest from foreign investors and a distinct lack of available assets for sale and recent sales is likely to change that over the short term. $1,000m $800m $600m $400m $200m 7,000 6,000 5,000 4,000 3,000 2,000 1,000 $0m Vendor & Purchaser Type (>$5 million) Vendors Purchasers 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other Capital Values ($/sq m) vs. Market Yield (%) 9,000 Capital Value - Brisbane Fringe 8,000 Market Yield (RHS) 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% savills.com.au/research 5
Recent Notable Sales (by Sale Price) Property Price ($m) Date NLA Yield Type $/sq m 505 St Paul's Tce, Fortitude Valley 205.50 Jan-17 17,618 5.87 e 11,664 25 King St, Bowen Hills 139.13 Jan-17 14,920 6.14 e 9,325 520 Wickham St (HQ South), Fortitude Valley 119.15 Jun-17 14,673 6.47 e 8,120 108 Wickham St, Fortitude Valley 106.23 Dec-17 11,901 6.45 e 8,926 199 Grey Street, South Brisbane, South Brisbane 92.60 Oct-17 12,025 7.27 e 7,701 199 Grey St, South Brisbane 92.60 Oct-17 11,800 n.a n.a 7,847 100 Wickham Street, Fortitude Valley 83.83 Sep-17 13,131 7.18 e 6,384 31 Duncan St, Fortitude Valley 64.00 Dec-17 4,183 6.60 i 15,300 12 Commercial Rd (Waterloo Junction), Newstead 47.00 Sep-17 6,558 6.90 e 7,167 164 Grey St, South Brisbane 30.30 Jan-17 3,065 6.15 e 9,886 ; r = reported yield; e = equated market yield; i = initial yield Rents Rents in Brisbane Fringe recorded marginal growth in 2017. A Grade gross face rents ranged between $525 and $625 per square metre, whilst B Grade gross face rents ranged between $400 and $495 per square metres in December 2017. Average A Grade rents rose 3.5% over 2017. On the other hand, growth in B Grade rents was more pronounced, with B Grade net face rents increasing by 6.7% in 2017 and B Grade net effective rents increasing by 11.5% over the same period. Latest economic indicators are fortuitous of more positive demand fundamentals in Queensland, with State Final Demand in Queensland back above the 10 year average and projections of continued improvements to the Queensland economy. In addition, with only two developments due for completion in 2019 (78% pre-committed), there is little supply projected, which should protect rents at their current levels and perhaps even drive an increase. Net Effective Rents by Grade ($/sq m) Net Face & Net Effective Rents (as at December 2017) 400 Grade A Grade B 350 300 250 200 150 100 50-500 400 300 200 100 Net Face Rent Net Effective Rent Net Incentive % - rhs 445 320 240 145 41 40 39 38 37 36 35 - Grade A Grade B 34 savills.com.au/research 6
PCA Summary Table by Precinct Brisbane Fringe (as at Dec-17) Inner South Milton Spring Hill Toowong Urban Renewal Brisbane Fringe (Total) Total Stock ( 000) 286.2 236.8 134.0 76.8 485.9 1,219.6 Total Vacancy ( 000) 31.8 42.3 24.6 9.1 67.6 175.4 Vacancy (%) 11.1 (6.9) 17.9 (11.6) 18.4 (11.9) 11.8 (7.1) 13.9 (11.0) 14.4 (10.4) Net Absorption ( 000) 18.6 (8.5) 6.3 (0.5) -12.3 (-5.3) -0.2 (-1.3) -16.9 (21.6) -4.5 (23.8) Net Absorption (%)* 7.9 (4.1) 3.3 (0.2) -10.1 (-3.9) -0.2 (-1.8) -3.9 (7.5) -0.4 (2.6) Net Additions ( 000) 22.1 (11.6) -0.8 (4.5) -3.6 (-3.0) -1.0 (-0.4) -14.4 (27.6) 2.3 (40.3) Stock Additions ( 000) 23.8 - - - - 23.8 Stock Withdrawals ( 000) 1.7 0.8 3.6 1.0 14.4 21.5 Source: PCA / Savills Research (10yr Averages shown in brackets); *As a percentage of occupied stock Outlook As is the case with Brisbane CBD, there appears to be a turnaround in Brisbane Fringe. With only 35,625 square metres of stock due to be delivered in the next 2 years (with a pre-commitment rate of 78%), supply will play a minor part in the Brisbane Fringe office market over the short term. Thereafter, close to 150,000 square metres of stock is due to hit the Fringe market in the 2019/20 period as developers identify a potential lack in prime space. Demand fundamentals are looking increasingly positive as the Australian economy continues on its path to recovery. Latest projections for private fixed capital investments point to a sharp uptick for the non-resources sector, particularly for the services industry, with the Queensland economy a prime beneficiary. A recovering labour market will further provide some boost to office demand and rental growth rates. Whether this is enough to counter the negative effect from increased competition from Brisbane s CBD, seen over the last 6 months, remains to be seen. Renewed investor interest in Brisbane Fringe s office market, particularly from foreign investors (who have been thus far more focused on the Southern cities) is likely to boost capital values, whilst driving yields further down. A lower for longer outlook on interest and bond rates will further exacerbate tightening yields. savills.com.au/research 7
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Development Map 2 3 6 4 7 1 5 8 Building Address Dev Stage NLA Exp. Comp Precinct Tenants 1 2 3 4 5 6 7 8 900 Ann Street, Fortitude Valley UC 21,625 2019 Urban Renewal Aurizon 25 King Street, Bowen Hills UC 14,000 2019 Urban Renewal Aurecon 11-15 Breakfast Creek Rd, Newstead DA 29,517 2020 Urban Renewal John Holland 301 Wickham Street, Fortitude Valley* DA 40,398 2020 Urban Renewal - 100-108 Alfred Street, Fortitude Valley* DA 35,067 2021 Urban Renewal - 435 St Paul s Terrace, Fortitude Valley* DA 40,834 2021 Urban Renewal - 801 Ann Street, Fortitude Valley* DA 39,332 2021 Urban Renewal - 30 Little Cribb St, Milton* DA 30,912 2021 Milton - ; *Subject to pre-commitments savills.com.au/research 9
Brisbane Fringe Key Indicators (as at Dec-17) A Grade B Grade Low High Low High Rental Gross Face ($/sq m) 525 625 400 495 Rental Net Face ($/sq m) 393 493 273 368 Incentive Level - Gross (%) 31 42 35 45 Rental Net Effective ($/sq m) 205 270 115 170 Outgoings Operating ($/sq m) 75 110 75 100 Outgoings Statutory ($/sq m) 30 50 30 50 Outgoings Total ($/sq m) 105 160 105 150 Typical Lease Term 3 10 3 7 Yield Market (% Net Face Rental) 6.00 7.00 7.00 8.25 IRR (%) 7.75 8.25 8.25 9.00 Cars Permanent Reserved ($/pcm) 250 395 180 300 Cars Permanent ($/pcm) 275 385 0 0 Office Capital Values ($/sq m) 5,750 11,000 3,500 9,000 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 ppearsall@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