Assessing the long-term potential of Macquarie Park March 2016 Summary The Macquarie Park office market acts as a business cluster for companies in the health, education and technology sectors. The cluster is well developed with 12 of the world s largest companies by market capitalisation located in Macquarie Park. Population growth in the North and West Central subregions is projected to exceed the rate for metropolitan between 2016 and 2026. Adding the population forecasts for the LGAs west of the City of in the Central sub-region expands the workforce catchment of Macquarie Park to over 50% of metropolitan s population by 2026. New infrastructure supports the attractiveness of Macquarie Park as a destination for a diverse cohort of office occupiers. Metro Northwest which will integrate with existing train stations at Macquarie Park and North Ryde is scheduled to open in 2019. Macquarie Park is the largest monitored A Grade office market in metropolitan (outside of the CBD). The demand led asset creation cycle has resulted in 44.7% of office product in Macquarie Park being less than 10 years old. Pricing in Macquarie Park presents a cyclical opportunity for investors seeking exposure to the growth sectors of the Australian economy. The prime yield spread, at the tighter end of the range between Macquarie Park and Parramatta is 50 basis points 40 basis points wider than the long-term average of 10 basis points. A more relevant office market New development activity has resulted in the Macquarie Park office market increasing from 135,800 sqm in 2000 to 723,500 sqm in 2015. Development in Macquarie Park has been demand-led with purpose-built campus facilities for multi-national corporations in the technology, pharmaceutical and education sectors. As a result, Macquarie Park has accounted for a high proportion of s underlying demand growth with net absorption of 316,100 sqm recorded between 2005 and 2015. To put the net absorption result in context, Macquarie Park recorded stronger net absorption than every other monitored metropolitan office market, the Brisbane CBD (172,800 sqm) and Perth CBD (103,000 sqm) over the same time period. Macquarie Park comprises 723,500 sqm of office stock. Table 1 shows the composition of s metropolitan office markets. Macquarie Park is the largest A Grade market and accounts for 21.0% of A Grade stock across the monitored metropolitan office markets. Table 1: Metropolitan office markets Market Number of A Grade Assets A Grade Stock % of total A Grade Macquarie Park 40 496,600 21.0 Fringe 36 363,900 15.4 North 20 327,400 13.9 Parramatta 22 296,500 12.6 Olympic Park / Rhodes 24 279,200 11.8 Norwest 19 194,500 8.2 Chatswood 8 148,800 6.3 South 12 143,700 6.1 St Leonards 10 109,400 4.6 Total 191 2,359,900
The asset creation cycle in Macquarie Park has increased the number of modern A Grade assets in the precinct. JLL Research tracks 40 A Grade assets in Macquarie Park. Approximately 45% of product in Macquarie Park is less than 10 years old. The completion of new product and the appreciation of asset values have increased the investable universe of Macquarie Park. Capital stock by value in Macquarie Park has increased by 12.7% per annum between 2001 and 2015. We have assessed the capital stock by value of Macquarie Park at $3.4 billion. For a fund manager seeking to achieve diversification across an office portfolio, Macquarie Park has become a more relevant investment destination. Figure 1: Capital stock by value $, million $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Macquarie Park Chatswood St Leonards Parramatta North 2001 2007 2014 Exposure to growth sectors of the economy Macquarie Park acts as a cluster of interconnected businesses, suppliers and associated institutions in the education, health care (including pharmaceuticals) and ICT (information, communications and technology) industry sectors. Clustering provides the catalyst for three important activities: increased productivity, more rapid innovation and new business formation. Anchor tenants of Macquarie Park are large multinational corporations. PwC produces an annual publication ranking the top 100 companies in the world by market capitalisation 1 (Table 2). Macquarie Park is the Australian headquarters for a number of the world s largest companies with 12 of the top 100 companies by market capitalisation located in Macquarie Park. Furthermore, Macquarie Park is the headquarters for four companies included on the S&P/ASX 100 Index Sonic Healthcare, TPG Telecom, Aristocrat Leisure and Cochlear. Table 2: Companies located in Macquarie Park and ranked in the global top 100 by market capitalisation Name Nationality Rank Market Cap (USD, bn) Microsoft US 5 334 Johnson & Johnson US 8 280 Novartis Switzerland 10 267 Pfizer US 20 214 Oracle US 30 188 Merck & Co US 37 163 Sanofi France 50 130 Amegen US 55 121 Medtronic Ireland 68 111 3M Co US 74 105 Biogen Idec US 79 99 AstraZeneca UK 97 87, PwC Macquarie University provides access to highly skilled labour for multinational corporations and domestic companies in the Macquarie Park precinct. The University is ranked by QS World University Rankings in the top 8% of 3,551 evaluated universities 2 and has approximately 39,000 students enrolled. While limited research is currently undertaken by high-tech companies in Macquarie Park, Johnson & Johnson signed a relationship with the University in 2014 to help forge long-term links between the University and the worldwide research arms of Johnson. Deeper and more strategic relationships between the University and large multinational corporations will increase the retention rates of tenants in the Macquarie Park precinct. The Health Care, Information Services and Education sectors are growth sectors of the Australian economy. Deloitte Access Economics projects the Australian economy will grow by an average of 2.6% per annum between 2015 and 2020 below the long-term average of 3.2% per annum recorded between 1995 and 2015. However, the aggregate output from the Health Care, Information Services and Education sectors is forecast to grow at a faster rate (3.2% per annum) than the domestic economy (2.6% per annum) between 2015 and 2020. As a result, these three industry sectors will make relatively larger contributions to the Australian economy and are projected to comprise 17.1% of economic output by 2020. The expansion of these sectors will underpin tenant demand in Macquarie Park. 1 PwC, Global Top 100 Companies by Market Capitalisation, March 2015 2 QS World University Rankings, 2015 2 Assessing the long-term potential of Macquarie Park March 2016
Figure 2: Industry sector output, 2015 to 2020 Y/Y, % Change 10% 8% 6% 4% 2% 0% An affordable destination for corporates, Deloitte Access Economics Macquarie Park prime rents have trended higher since a cyclical low was recorded in 1Q10. JLL has recorded an increase in prime gross effective rents of 17.5% between 1Q10 and 4Q15. Nevertheless, Macquarie Park remains an affordable destination for tenants. Figure 3 shows average prime gross effective rents in 4Q15 across a number of office markets. We have indexed the 4Q15 observation for Macquarie Park to 100. The affordability of Macquarie Park is highlighted with average prime gross effective rents 55.1% lower than the CBD and 15.8% below the average recorded for Parramatta. Figure 3: office markets prime gross effective rents Macquarie Park = 100 250 200 2015 2016 2017 2018 2019 2020 Information Services Health Care Education Others The Macquarie Park development outlook, measured as projects under construction, is moderate with 8,000 sqm of space under construction, equating to 1.1% of total stock. The only development currently under construction is 66-82 Talavera Road (8,077 sqm) and the project is partly pre-committed by AstraZeneca. Growth in tenant demand, limited new supply and tight A Grade vacancy will exert upward pressure on rents. Prime gross effective rents increased by 5.2% in 2015 and are expected to increase by a further 4.3% in 2016. Improved accessibility and greater amenity The workforce catchment for Macquarie Park will expand through strong population growth, while the provision of new infrastructure will improve the accessibility of Macquarie Park. The NSW Department of Planning & Environment divides its strategy for metropolitan into six sub-regions. The City of Ryde is located in the North sub-region, while the West Central sub-region would also form part of the workforce catchment for businesses located in Macquarie Park. The combined population growth of these two sub-regions is projected to be stronger than metropolitan increasing by an average of 1.9% per annum between 2016 and 2026. By 2026, the NSW Department of Planning & Environment forecasts 44.2% of metropolitan s population will reside in the North and West Central sub-regions (Figure 4). If we supplement the workforce catchment of Macquarie Park with the Local Government Areas (LGAs) west of the City of in the Central sub-region, the catchment of Macquarie Park increases to over 50% of metropolitan s resident population by 2026. Figure 4: Composition of metropolitan population, 2026 150 South 7.6% 100 South West 15.4% North 19.5% 50 Macquarie Park Parramatta Olympic Park Chatswood St Leonards Fringe North CBD The medium-term rent outlook for Macquarie Park is firm. A Grade vacancy is tight at 6.6% and limited options exist for contiguous space. For a tenant seeking 1,500 sqm of A Grade space outside of the sub-lease market, seven options are available. In a normal short-listing process, approximately half of the available options are discounted based on price and location, reducing the number of viable options for a 1,500 sqm tenant to three or four. South 13.9% Central 19.0% West Central 24.7%, NSW Department of Planning & Environment 3 Assessing the long-term potential of Macquarie Park March 2016
Metro is Australia s largest public transport infrastructure project. Metro Northwest (formerly the North West Rail Link) is the first stage of Metro and is scheduled to open in the first half of 2019. The Metro Northwest will be integrated with the existing Macquarie Park and North Ryde train stations. New public transport infrastructure improves the accessibility of Macquarie Park, making it a more attractive and accessible destination for workers and future residents. The redevelopment of the Macquarie Centre shopping centre in 2014 improved the retail amenity for occupiers of Macquarie Park. AMP has recently lodged a Stage 1 Concept Plan DA to guide the future development of the Macquarie Centre. The development application seeks approval for: an expansion of the shopping centre along Herring Road, building envelopes for four mixed use towers (148,000 sqm) and additional car parking (2,175 spaces). A cyclical investment opportunity Transaction evidence in a number of non-cbd office markets has reflected new pricing benchmarks for modern, long-dated lease product. Capital has been concentrated on North, Parramatta and Macquarie Park. From a pricing perspective, Macquarie Park is typically benchmarked to Parramatta and the industrial sector. Figure 5 shows yield movements from the start of 2007 to 2015. The tighter end of the JLL yield range has been adopted to control for product quality and allow a more relevant comparison between markets. Asset pricing has moved below 2007 levels. However, the yield spread between s Outer Central West and Macquarie Park is 25 basis points a reversal of the long-term average where office assets in Macquarie Park are assessed on tighter yields than the industrial sector. Based on this analysis, asset pricing in Macquarie Park is attractive relative to the industrial sector. Figure 5: Prime equivalent yield movements, 2007 to 2015 Conclusion Investors are attracted to sectors and markets with long-term growth potential. Macquarie Park is intrinsically linked to growth sectors of the Australian economy and will benefit from the organic expansion of the existing tenant base and new entrants into the precinct. Furthermore, population growth and new infrastructure increases the workforce catchment and accessibility of Macquarie Park, while the development of strategic relationships between the University and anchor tenants will further entrench multinational corporations in the precinct. The medium-term supply outlook is well managed with only one project under construction (8,077 sqm), equating to 1.1% of total stock. One of the identified long-term risks in Macquarie Park is the availability of development sites. JLL is tracking 177,600 sqm worth of potential projects which are at various stages of planning and marketing. However, new developments are unlikely to commence without pre-commitment, while the highest and best use for sites with mixed use zoning is residential. Nevertheless, in the medium-term Macquarie Park offers a cyclical investment opportunity. Yield spreads between Macquarie Park and s Outer Central West are wider than historical benchmarks. A wide yield spread can be partly explained by rental growth expectations. However, we project prime gross effective rents will increase by 4.3% in 2016. Macquarie Park, along with the CBD and Parramatta, will accommodate the bulk of the growth in s office stock over the next decade. As Macquarie Park gains scale and liquidity improves, it will be re-rated by investors as an investment destination. A re-rating ultimately flows through to narrower yield spreads between Macquarie Park and other office markets. Authors: Basis Points 200 150 100 50 0-50 -100 2007 2008 2009 2010 2011 2012 2013 2014 2015 Macquarie Park Parramatta Outer Central West (Industrial) Andrew Ballantyne Head of Strategic Research Australia JLL tel: +61 2 9220 8412 andrew.ballantyne@ap.jll.com Denys Bizinger Head of North Office & Industrial Sales & Leasing NSW JLL tel: +61 2 9936 5876 denys.bizinger@ap.jll.com 4 Assessing the long-term potential of Macquarie Park March 2016
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