melbourne cbd office market update august 2013

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  • 8/12/2019 Melbourne CBD Office Market Update August 2013

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    MELBOURNE CBD OFFICE MARKET UPDATEAUGUST 2013

    A GRADE 12 MONTH OUTLOOK

    Net Face Rents ($ per m 2 NLA) $400 - $500

    Net Incentives (%) 20% - 30%

    Market Yields (%) 6.75% - 7.50%

    Internal Rate o Return (IRR) 9.00% - 9.50%

    Capital Values (per m2 NLA) $5,000 - $7,000

    Outgoings - Excluding Tenancy Cleaning (per m2 NLA) $110 - $120

    Vacancy (July 2013) 9.8%

    Total Stock (m2, July 2013) 4,341,542

    Net Supply (m2, 12 mths to July 2013) 191,549

    Net Absorption (m2, 12 mths to July 2013) -2,973

    8 EXHIBITION STREET, MELBOURNE

    Cbus recently sold two 50% shares to GPTWholesale Property Fund and Keppel REIT

    or $160.05 million and $160.20 million

    B O U R K E

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    OVERVIEW

    Australian property markets continue to draw a high level o investmentunderpinned by attractive yields and relatively stable economic conditions.Whilst leasing conditions in most Australian CBD office markets have sofened,there continues to be strong investment activity or prime office assets, particularlyalong the eastern seaboard including the Melbourne CBD.

    Over the period rom January 2013 toDecember 2015, a total o some 303,000m2 o office accommodation will be completed.While approximately 75% o this space isprecommitted, the majority o tenants will berelocating rom existing buildings leading to asubstantial increase in the availability o backll space.

    The Melbourne CBD recorded negative netabsorption or the rst time since July, 2009.Net absorption o approximately -3,000m2 overthe 12 months to July, 2013, is signicantly belowthe annual average o approximately 53,000m2 achieved over the past ve years. Net absorptionis expected to continue below trend over the next12 months while tenant demand remains weak.

    On the back o negative net absorption andconsiderable new supply coming online, thevacancy rate has climbed rom 6.9% in January,2013 to 9.8% in July, 2013.

    Vacancy rates are expected to continue on thistrend in the short term on the back o urthernew supply and continued weak tenant demand.

    Growth in net ace rents has been subduedor the last 12 months, while incentives have

    generally increased causing net effective rentsto decline. Net ace rentals are expected toremain static in the near term.

    Despite weak leasing undamentals, thestrong appetite or prime office assets in theMelbourne CBD rom both local and oreigninvestors has resulted in prime yields tighteningby approximately 25 basis points over the past6 months. Further prime yield compression isanticipated, underpinned by strong investmentdemand rom domestic wholesale unds,superannuation unds, A-REITS and offshoreinvestors.

    KEY MARKET INDICATORS

    Source: Property Council of Australia (PCA), Urbis

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    C O L L I N S

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    MELBOURNE CBD OFFICE MARKET UPDATEAUGUST 2013

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    Remaining Precommitted

    2013 2014 2015

    COMPLETED

    NEW SUPPLY

    B O U R K E

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    699 BOURKE STREET, DOCKLANDS

    Mirvac recently secured a 15,000m2 precommitment rom AGL or a proposed18,500m2 building at the northern end o adevelopment deck above Southern CrossStation. The building is expected to becompleted in mid-2015.

    The completion o the ATO building at 747Collins Street, Docklands (40,000m2) andMelbourne Water building at 990 Latrobe Street,Docklands (13,000m2) in mid 2012 signied thecommencement o the current commercialconstruction phase in the Melbourne CBD.

    Following these buildings, other recent majorcompletions include Aurecon at 850 CollinsStreet, Docklands (16,000m2), 171 Collins Street,Melbourne (31,500m2) and Marsh Mercer at 717Collins Street, Docklands (39,000m2). There hasbeen some 192,000m 2 o net supply added to theMelbourne CBD over the past 12 months.

    While net supply or the 12 months to July,2013, was considerably above the long-termaverage, the Melbourne CBD office marketcontinues to be demand-led with signicantpre-commitments required prior tocommencement o construction.

    There are currently 8 major commercial projectsunder construction totalling approximately233,000m2, summarised as ollows:

    33% (76,000m 2) o the new supply isexpected to be completed in the remaindero 2013, with 38% (88,000m2) in 2014 and29% (68,000m2) in 2015.

    68% (159,000m 2) o the new supply is in theDocklands precinct;

    34% (78,000m 2) o the new supply is inCollins Street.

    Whilst leasing conditions remain weak andnew stock continues to come online between

    2013 and 2015, lumpy amounts o backllaccommodation vacated by pre-committedtenants will likely put pressure on theper ormance and presence o some secondarystock.

    SUPPLY & DEVELOPMENT ACTIVITY

    C O L L I N S

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    * Approximate

    RECENT LEASING ACTIVITY

    360 COLLINS STREET, MELBOURNEDexus recently leased 3,690m 2 to UXC overLevels 17-19 and 1,200m2 to Beddison Groupon Level 35.

    There has been limited leasing activity in theMelbourne CBD over the past 12 months.Tenant demand continues to remain subduedon the back o low business condence andcontinued internal pressures to minimisebusiness costs. These leasing conditions areexpected to remain in the near term.

    The majority o recent leasing activity tooccur relates to opportunistic tenants takingadvantage o avourable leasing conditions toupgrade to superior quality accommodationat competitive rents with large inducements.

    While many organisations continue tobe hesitant regarding accommodationrequirements, several organisations havecontinued to plan or the long-term, with recentpre-commitments including Corrs ChambersWestgarth (8,700m 2), Leighton Contractors(12,700m2) and AGL (15,000m2).

    The total vacancy rate climbed rom 6.9% inJanuary, 2013 to 9.8% in July, 2013. The vacancyrate is expected to continue on this trend in theshort term on the back o consistent new supplycoming online and weak tenant demand.

    Although a large proportion o the newaccommodation is precommitted, backllspace created rom tenants relocating to newbuildings is a major contributor to recentincreases in vacancies, together with reducedspace requirements rom the Victorian StateGovernment.

    The rise in vacancy is likely to lead to older stockbeing demolished or re urbished or residentialuse (i.e. 35 Spring Street, 199 William Street andpotentially 85 Spring Street).

    Current leasing conditions have stalled net acerent growth or both prime and secondary gradestock, while incentives have generally increased.Prime incentives are generally in the rangeo 20% to 30% which is expected to increaseto 25% to 30% and above or the next 6 to 12months.

    LEASING MARKET

    ADDRESS TENANT COMM. DATE RISE NLA (SQM) TERMS (YEARS) NET FACE RENT($ SQM)

    567 Collins Street Corrs Chambers Westgarth Mid-15 Mid 8,708 12 $575

    567 Collins Street Leighton Contractors Mid-15 Low 12,701 7 / 12 $539

    699 Bourke Street AGL Mid-15 Low 15,000 10 $475 *

    313 Spencer Street Victoria Police Dec-14 Low - Mid 27,754 20 $440

    360 Collins Street Beddison Group Jan-14 High 1,200 10 $500

    360 Collins Street UXC Oct-13 Mid 3,690 5 $430

    55 Collins Street Sales Force Oct-13 Mid 1,000 5 $420

    55 Collins Street GTA Consultants Oct-13 Mid 1,000 5 $420

    55 Collins Street RSM Bird Cameron Oct-13 Mid 1,954 10 $450

    35 Collins Street Salta Properties Aug-13 Mid 1,700 10 $530

    530 Collins Street Suncorp Jul-13 High 15,443 10 $490

    367 Collins Street Sportsbet Mid-13 Mid 6,525 10 $420

    8 Exhibition Street ISPT Apr-13 Low 1,619 5.25 $444

    90 Collins Street FB Rice Apr-13 Low 1,050 10 $475

    B O U R K E

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    C O L L I N S

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    B O U R K E

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    567 COLLINS STREET, MELBOURNE

    Investa Office Fund and Investa CommercialProperty Fund purchased on a und-throughbasis or $462.0 million comprising an up rontpayment o $38.0 million.

    Despite weak leasing undamentals, theMelbourne CBD continues to attract high levelso domestic and oreign investment, particularly

    or prime grade office buildings.

    Recent transactions reect that prime yieldshave compressed by approximately 25 basispoints over the last 6 months, with a similarmovement anticipated in the near termunderpinned by strong investment demand romall types o buyers including domestic wholesale

    unds, superannuation unds, A-REITS andoffshore investors.

    Prime internal rates o return have also recentlyreduced by approximately 25 to 50 basis points.Given the expectation that the current lowination and low interest rate environment willremain, internal rates o return are expected todecline urther.

    The gap between prime and secondary gradeyields is expected to continue to widen in theimmediate term until investors are drawn torisk-adjusted returns or secondary property.

    INVESTMENT MARKET

    B O U R K

    E S T

    313 SPENCER STREET, DOCKLANDS

    BUILDING DETAILS:

    To be completed, a medium rise A Grade officecomplex designed or the requirements oVictoria Police. Upon completion, the projectwill provide office accommodation over groundand 12 upper levels, together with ground levelretail and basement car park. The building willincorporate a dedicated 3 level police station andhas been designed to achieve a 4.5-star NABERSbase building energy rating and 5-star GreenStar rating. Although a low rise office building,the design and location with limited surroundinghigh-rise buildings, together with curtain wallglazing is expected to provide adequate naturallight to most levels. The development is due orcompletion in December, 2014.

    COMMENTS:

    Victoria Police, a branch o the Victorian StateGovernment (AAA credit rating), precommitted100% o the office accommodation or an initialterm o 20 years with xed 4% annual reviewsand a market review in Year 16 subject to a15% cap and collar. As at the date o sale, theonly vacant component was 241m 2 o retailaccommodation on the ground oor. The 50%share was purchased on a und-through basiscomprising an up ront payment to acquirethe land plus added value o demolition andpreliminary construction, with the balance o thepurchase price to be paid in periodic instalmentsover the construction period. For the purpose ouranalysis, we have taken into account the stampduty saving o approximately $11.33 million.

    SALE DETAILS: FINANCIAL ANALYSIS:

    Sale Price: $116,000,000 (50% interest) * Initial Yield: 6.38%Sale Date: February 2013 Equivalent Market Yield: 6.56%Purchaser: Invesco Asset Management Aust Internal Rate o Return: 9.32%Vendor: Australia Post / Cbus Capital Value ($ per m2 NLA) $8,287NLA: 27,995m2

    Cars: 300 bays

    * Purchased on a fund-through basis

    C O L L I N S

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    C O L L I N S

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    MAJOR TRANSACTION SUMMARY313 SPENCER STREET, DOCKLANDS

    RECENT TRANSACTIONS

    PROPERTY SALEDATE

    SALE PRICE NLA(SQM)

    CAPITALVALUE

    ($ SQM NLA)

    MARKETYIELD (%)

    8 Exhibition Street, Melbourne(50% Interest)

    Jun-13 $160,200,000 44,932 $7,131 6.78%

    90 Collins Street, Melbourne May-13 $170,000,000 21,255 $7,998 7.10%

    8 Exhibition Street, Melbourne(50% Interest)

    Mar-13 $160,050,000 44,932 $7,124 6.78%

    567 Collins Street, Melbourne Mar-13 $462,200,000 54,248 $8,516 7.06%

    313 Spencer Street, Docklands(50% Interest)

    Feb-13 $116,000,000 27,995 $8,287 6.56%

  • 8/12/2019 Melbourne CBD Office Market Update August 2013

    5/5 URBIS.COM.AU 5

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