Savills Research Briefing West Perth Office Highlights Recentralisation to the CBD remains a feature in West Perth, with a number of tenants relocating from West Perth to the CBD, contributing to the rise in the vacancy rate over 2017; The upswing in the vacancy rate was predominantly a result of returning refurbished supply, the largest level since 2014, in line with improved confidence levels for long-term performance of the market; Demand indicators support the flight to quality trend, with A grade recording its highest rate of net absorption since 2012; Investment enquiry has predominantly been led by opportunistic investors operating under a value-add or repositioning strategy. A Grade Averages Latest Yr Change Outlook Rental N.F. ($/sq m) 325 +0.0% Incentives 45.0 +750bps Rental N.E ($/sq m) 180-12.2% Yield Market (%) 7.90-10bps IRR (%) 8.25-15bps Capital Values 4,100 +0.0% Demand & Supply Latest PCP* Vacancy 16.7 17.5 Net Absorb. ( 000 sq m) 5.7-22.8 Stock U/C ( 000 sq m) - % of market - - - % committed - - *PCP = Previous Corresponding Period
Report Contents Vacancy 3 Supply 3 Leasing Activity & Demand 4 Sales Activity 5 Rents 6 Outlook 7 Development Map 8 Key Indicators 10 Key Contacts 10 Associate Director Research Katy Dean kdean@savills.com.au Research Analyst Research Nicholas Volk nvolk@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 West Perth office market generally includes the areas bounded by the Mitchell Freeway, Kings Park Road, Thomas Street and the railway line. The precinct is the seventh largest fringe market nationally (out of 17), with approximately 428,864 square metres of office floor space. The area has traditionally had high occupancy rates due its fringe location and ease of access. West Perth does have a high volume of ageing stock which presents a number of refurbishment and value-add opportunities. There are several existing tenancies which have low-cost upgrades to internal fit-outs either underway or in planning stage. Recentralisation to the CBD remains a feature in West Perth, contributing to the rise in the vacancy rate over the past six months. On the upside, suburban market tenants are relocating back or into West Perth for the first time and there are a number of relocations occurring from within the precinct, suggesting a continuation of the flight to quality trend. Traditionally, few major assets above $25 million change hands in West Perth, with just two assets being exchanged in this price bracket over the last five years. While the wide yield spread between West Perth and other fringe markets remains very attractive and continues to be a drawcard for investors looking at counter-cyclical opportunities, recent investment has predominantly been led by opportunistic investors operating under a value-add or repositioning strategy. PCA Summary Table West Perth (as at Dec-17) Prime Secondary Total Aus Non CBD Total Stock ( 000) 138.5 290.4 428.9 7,273.3 Total Vacancy ( 000) 19.6 51.9 71.5 660.7 Vacancy (%) 14.2 (5.9) 17.9 (9.6) 16.7 (8.4) 9.1 (8.9) Net Absorption ( 000) 6.2 (1.3) -.5 (-2.7) 5.7 (-1.4) 11.5 (57.6) Net Absorption (%)* 5.5 (1.2) -0.2 (-1.1) 1.6 (-0.4) 0.2 (0.9) Net Additions ( 000).0 (3.3) 2.5 (2.5) 2.5 (5.8) -36.5 (86.3) - Stock Additions ( 000) 4.0.8 6.5 102.5 - Stock Withdrawals ( 000) 4.0 0.0 4.0 139.0 Net Additions (%)** 0.0 (2.8) 0.9 (0.9) 0.6 (1.5) -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 Despite elevated levels of tenant enquiry during the first half of 2017, the headline vacancy rate rose to 16.7% in December 2017 from 15.0% in June 2017. However, year-on-year, the rate is down 80 basis points from West Perth s historical high of 17.5% back in December 2016. The increase in the vacancy rate over the six months to December 2017 can be attributed to returning supply, the highest volume of supply additions since December 2013. Of the 4,803 square metres reintroduced into the market, 66 Kings Park Road was a major contributor after being withdrawn in 2017 to undergo refurbishment. Additionally, in the six months to December 2017, there were no withdrawals of space which maintained the gap between occupied and vacant stock. The flight to quality trend underpinned tenant demand for space in the area, with tenants seeking to upgrade within the precinct, as well as suburban migration, particularly from nearby precincts, including Subiaco. A grade vacancy is 14.2% in December 2017, down from 18.6% a year earlier, while B grade vacancy totals 26,363 square metres or 15.0%, down from 15.4% 12 months prior. While the upswing in the headline vacancy rate for the six months to December 2017 was a result of returning supply, the demand indicators support the flight to quality trend. For the first time since 2013, A grade space had positive net absorption of more than 5,000 square metres. Historic Vacancy (West Perth) 20% Prime Secondary Total 16% 12% 8% 4% 0% Net Supply 40,000 Historic Net Additions Savills Forecast 15yr Avg 30,000 20,000 10,000 - (10,000) (20,000) (30,000) Source: PCA / Savills Research Source: PCA / Savills Research Supply Over the last decade, the West Perth office market has had very few sites available for development. However, in the last six to 12 months, there have been sales driven by repositioning strategies that will potentially lead to an increase in building refurbishment and site redevelopment in the future. Having undergone extensive refurbishment in the latter half of 2017, 66 Kings Park Road has been reintroduced to the market with circa 4,000 square metres of A grade space. A mixed-use project at 957-959 Wellington Street has been given development approval, however the project remains mooted and is unlikely to go ahead without a degree of pre-commitment. Plans include the construction of an eight level mixed-use building with four commercial tenancies covering approximately 1,414 square metres of office space. savills.com.au/research 3
Leasing Activity & Demand In the 12 months to March 2018, Savills identified approximately 12,083 square metres of leasing activity (>500 square metres) in the West Perth office market. The total volume is below activity levels 12 months prior, and in terms of the number of transactions, is the lowest since March 2009. The average size per transaction was above the five year average. Of the 12,083 square metres identified leased in the West Perth in the 12 months to March 2018, the Finance and Insurance sector was the most dominant, accounting for 57.7% of transactions by volume, or 6,967 square metres. Mining accounted for 26.7% or 3,222 square metres. The largest transaction that took place in the last 12 months was the renewal of 6,967 square metres for Insurance Australia Group (IAG) at 42-46 Colin Street. Centuria Metropolitan REIT acquired the leasehold interest of 42-46 Colin Street West Perth from Dexus for $33.6 million in July 2017. IAG renewed terms with Dexus for four levels within the building. More recently, CHC Helicopters extended its lease by five years at the IBM Centre while LWP Property Group leased 515 square metres for five years at the same premises. Western Areas, a mining company specialising in nickel production, reportedly renewed terms at 2 Kings Park Rd for a further four years. Leasing Activity by Precinct (> 500 square metres) 45,000 <= 5,000sqm 5,000sqm - 10,000sqm > 10,000sqm 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Leasing Activity by Tenant Type (> 500 square metres) Fin & Ins - 57.7% Mining - 26.7% W'Sale & Retail - 6.7% IT & Comm - 4.6% Prop & Bus Serv - 4.3% Recent Notable Leases (by Area Leased) Tenant Property Date NLA Type Rent Term IAG 42-46 Colin St, West Perth Jul-17 6,967 r n.a 5 MSP Engineering 1100 Hay St, West Perth Mar-17 2,568 s 340 (G) 2 Momentum Wealth 18-32 Parliament Pl, West Perth Feb-17 1,853 s 240 (N) 3 Western Areas 2 Kings Park Rd, West Perth Mar-18 1,440 d n.a 4 Prosthodontics 143 Colin St, West Perth Nov-17 812 d n.a 10 LWP Property Group 1060 Hay St, West Perth, WA Nov-17 515 d n.a 5 Leasing Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal savills.com.au/research 4
Sales In the 12 months to March 2018, Savills has identified approximately $33.6 million worth of office transactions (greater than $5 million) in the West Perth area. However, noted, this is only one transaction. On average, West Perth has turned over on average two office sales (greater than $5 million) per year throughout the last decade, indicative of the tightly held nature of this precinct. On that note, very few assets in the West Perth market are exchanged above $25 million, with only two properties being transacted over this price bracket in the past five years. In July 2017, Centuria Metropolitan REIT announced that it had made its first foray into Perth s office market, acquiring two assets, including the Hatch Building at 144 Stirling Street, Perth for $58.2 million from Charter Hall, and the leasehold title of 42-46 Colin Street in West Perth for $33.6 million from Dexus. The five level building is located on land that is owned by The Perth Diocesan Trustees and has been the home to Insurance Australia Group (IAG) since 2002. IAG continue to occupy approximately 6,967 square metres over four floors, and recently reset market lease terms with Dexus, resulting in a WALE of 4.5 years at the time of sale. The sale price reflects a passing yield of 8.70%. The gap between West Perth market yields and the bond rate remains and while it is apparent yields haven t yet returned to the lows of 2008/09, there is growing interest from both institutional investors and opportunistic buyers. This is a trend that Savills expects will continue in the shortterm. Sales Activity by Price $250m $5m - $50m $50m - $100m >$100m $200m $150m $100m $50m $0m Vendor & Purchaser Type Vendors Purchasers 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other Capital Values ($/sq m) vs. Market Yield (%) 9,000 Capital Value - West Perth Market Yield (RHS) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 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 42-46 Colin St, West Perth 33.60 Jul-17 8,439 8.70 i 3,982 26 Thomas St ( & 1 West St), West Perth 21.00 Mar-17 3,935 n.a V 5,337 ; ;i = Initial, r = Reported, e = Equated, v = Vacant, dev = development Rents As at March 2018, net face rents in West Perth typically range from $275 to $375 per square metre per annum for A grade. B grade rents remained unchanged, ranging from $225 to $275 per square metre per annum. Incentives have been gradually rising over the last three years, resulting in a decline in net effective rents of close to 40% over the same period. Similar to CBD trends, incentive levels vary by building grade, with A grade buildings now averaging 45%, or above in some cases. This is compounded due to the differing ownership profile that West Perth is known for when comparing to the CBD, with private investors resistant to adjusting incentives on offer to prospective tenants. As at March 2018, net effective rents typically range from $150 to $205 per square metre per annum for A grade and between $125 and $150 per square metre per annum for B Grade. Net Effective Rents by Grade ($/sq m) Net Face & Net Effective Rents (as at Mar 2018) 700 Grade A Grade B 600 500 400 300 200 100-350 300 250 200 150 100 50 Net Face Rent Net Effective Rent Net Incentive % - rhs 325 250 180 140 50 45 40 35 30 25 20 15 10 5 - Grade A Grade B 0 savills.com.au/research 6
Outlook There has been a number of improvements in the state economy, and although still segmented, there are green shoots. Growth in office job advertisements is now the highest nationally. Overall employment numbers increased through 2017, and are stronger than expected and the market is now characterised by more stable commodity prices. The fall in mining investment numbers has mostly run its course and confidence levels have lifted as noted by the demand improvements being seen in the CBD market. In the short-term, expect a continuation of tenants migrating from other inner suburban locations to West Perth, and the migration of some tenants to the CBD in the short-term. The gap between Prime (A grade) and Secondary space is likely to remain as a result. However, on the back of improvement in confidence levels may see an increase in speculative refurbishment activity as owners, new and existing, look to capitalise on tenant demand for Prime grade stock. While the vacancy rate has declined on a 12 months basis, no major shifts in the headline rate are expected in the shortterm. On that note, expect a similar range for incentives however, due to the ownership profile of the market, it will remain a building-by-building proposition. Recent transactional activity has generally represented investors operating under counter-cyclical and/or repositioning strategies. In light of current vacancy levels and low volume of A grade stock competing in the market, West Perth may see a continuation of this type of activity in the short-term. savills.com.au/research 7
Development Map LEGEND West Perth WEST PERTH ARTHUR ST RAILWAY ST THOMAS ST MURRAY ST WELLINGTON ST 1 SUTHERLAND ST ROE ST MARKET ST ORD ST COLIN ST HAY ST HAVELOCK ST MURRAY ST MITCHELL FWY KINGS PARK RD Building Address Dev Stage NLA Exp. Comp Tenant 1 957-959 Wellington St Mooted 1,414 Mooted savills.com.au/research 8
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Document type Briefing Notes - West Perth Office West Perth Key Indicators (as at Mar-18) A Grade B Grade Low High Low High Rental - Gross Face ($/sq m) 450 550 365 415 Rental - Net Face ($/sq m) 275 375 225 275 Incentive Level Net 40% 50% 40% 50% Rental - Net Effective ($/sq m) 150 205 125 150 Outgoings - Operating ($/sq m) 80 90 50 55 Outgoings - Statutory ($/sq m) 75 100 75 100 Outgoings - Total ($/sq m) 155 190 125 155 Typical Lease Term 3 5 3 5 Yield - Market (% Net Face Rental) 7.50 8.25 8.25 9.25 IRR (%) 8.00 8.50 8.00 9.75 Cars Permanent Reserved ($/pcm) 250 250 200 250 Cars Permanent ($/pcm) 325 350 300 325 Office Capital Values ($/sq m) 2,950 5,300 2,400 3,300 NB: All rents equivalent to whole floor mid-rise Key State Contacts Research Katy Dean +61 (0) 2 8215 6011 kdean@savills.com.au City & Metropolitan Sales Chas Moore +61 (0) 8 9488 4155 cmoore@savills.com.au Research Nicholas Volk +61 (0) 8 9488 4102 nvolk@savills.com.au Office Leasing Shelley Ritter +61 (0) 8 9488 4187 sritter@savills.com.au Valuations Mark Foster-Key +61 (0) 8 9488 4145 mfosterkey@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 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