Only a short time ago the Australian commercial property sector was
looking rather off-colour, but now for the first time in four years
demand for office space is on the up. From In The Black October 2005.
Five years ago it was a pretty miserable time for anyone in a white collar job.
While blue collar workers were whooping it up in a construction boom and kept the economy bumping along, the opposite was true in Australia’s offices.
Hit by the global post-dot.com bust and the shrinking of the consulting and financial services sectors, the white collars were definitely in recession. Then there was September 11 and the knock-on effect to the global economy.
The only glimmer of hope in the property sector was for any company looking for new space.
The negotiating power was on the side of the occupier looking for new space that had on offer cheap rents and a bunch of incentives, such as fit-outs and rent-free periods. The challenge was to pick when the market would bottom out.
But now, according to Kathryn Matthews, head of research at property consultants Jones Lang LaSalle (JLL), for the first time in four years demand for offices is increasing.
She says from 2000 to 2003 the market had negative net absorption, which in lay terms means more office spacing was coming onto the market than being let.
But now the market is on the turn, and Matthews says companies should start thinking about locking in rents.
‘We are very much in the early upturn phase, particularly in Sydney and Melbourne,’ she says, ‘and it is a good time to lock in some lower rents.’
The driving force behind the increased demand is strong employment figures. In July, according to the Australian Bureau of Statistics, job vacancies in the finance and insurance sector rose by 19.5 per cent in the previous three months. ‘We have seen that employment growth is very strong in recent times and we are down to our lowest unemployment rate ever,’ Matthews says. ‘So it’s [demand] really off the back of that very strong employment growth.’
In particular, office vacancy in the Melbourne CDB has dropped. ‘The second quarter of 2005 has seen a whirlwind of activity in Melbourne, with the high commitment levels to new stock inclusion coupled with an abundance of tenant expansion,’ Matthews says. ‘The Melbourne office market has been tightly held for some time, with very little residual space available within each office, so businesses experiencing growth are seeing a magnified turnaround.’
During the dark days of the early noughties, employers, if they needed extra staff, were cramming them into buildings, according to Matthews.
Figures published by property advisers DTZ bear this out. According to a recent occupancy costs study, occupancy costs have decreased in Sydney, Melbourne and Adelaide. It found the space occupied by the average Australian office worker in 2000 was an average of 20 sq m. By 2004 this had dropped by one-third to 14 sq m per employee.
Kim Hoang, research manager at DTZ, says the shrinking of office space was a direct result of the white collar recession.
But far from being an assault on the humble desk worker, the move simply brought Australia into line with international space standards. The average worker in London has a compact 10.5 sq m of space, while in China each worker has 10 sq m.
The result has been a reduction in occupancy costs to $10,190 per desk in Sydney, to $6,150 in Melbourne and $5,220 in Adelaide.
JLL’s Matthews says the logical conclusion is that when companies finally run out of room, they start to take more space. ‘It’s just a flow-through effect of white collar employment growth,’ she explains.
But Kevin Stanley, regional director of research at CB Richard Ellis, believes the office market is not yet out of the woods.
There are still some big buildings scheduled to be completed in both Sydney and Melbourne next year. Says Stanley: ‘We forecast that vacancies could actually rise again next year as a result of that.’
In addition to rising vacancies, the current spike in employment will flatten out.
According to Stanley, the market dynamics between Sydney and Melbourne are different. In an analysis of Sydney leases for the year to 30 June 2005, 97 per cent of space leased in the Sydney CBD was to companies already operating in the city. Stanley had expected tenants to move from the city fringes such as Surry Hills, Pyrmont and East Sydney to the CBD.
‘We thought they were going to be moving into the CBD to take up good leasing deals, which is the kind of concept that has occurred in Melbourne,’ Stanley says. ‘But some of the bigger tenants went to Macquarie Park and bypassed the city altogether.’
Coincidently, it was North Ryde and Macquarie Park, which share the same postcode, that were hit most by the early noughties recession. According to DTZ’s Hoang, the North Shore market’s vacancy rate increased sharply from 1.9 per cent in January 2001 to 12.7 per cent in January 2003.
And it was on the North Shore, especially at North Ryde and Macquarie Park, where some of the bargain deals can be found in Sydney.
In the sunshine state, the story is very different. Brisbane suffers from a shortage of quality commercial property and few new developments. The exception is the 30,000 sq m Harry Seidler-designed Riparian Plaza, of which 70 per cent has yet to be committed. It is set to be completed later this year.
This shortage, combined with a resources boom, has meant that in the past year gross-effective rents in Brisbane have increased by 17.5 per cent to $323 per sq m. In contrast, rents in Sydney have fallen by 1.2 per cent to $479 per sq m, and in Melbourne increased only 2.3 per cent to $318 per sq m.
JLL’s Matthews says the real surprise has been the strength of demand in the Melbourne market in the first half of the year. ‘They have had a huge increase in demand,’ she says. ‘A lot of finance and insurance and supporting services companies are moving into the docklands area. The big concern in Melbourne is what happens to the left-over space when everybody moves over to the Docklands.’
Asia builds on property markets
The Hong Kong Chinese have a passion for property investing. But unlike Australia, where there is a healthy market for Listed Property trusts (LPTs), much of the money comes from private funds. Developers have strong balance sheets and to date haven’t had to turn to the securitisation of property to raise funds.
Yet now frenzy surrounds the launch of Hong Kong’s first real estate investment trust (REIT), the Link fund, containing 151 shopping centres and 79,000 parking spaces injected by the Hong Kong Housing Authority. Link is being privatised to help pay off Hong Kong’s budget deficit.
Worth US$3bn, Link is set to become the world’s largest-ever privatised real estate property trust. Yet it has not been without its troubles. In December, the proposed IPO was 130 times over-subscribed, and had US$76bn offered by investors. At the same time, 67-year-old retiree Lo Sui-Ian challenged the legality of privatising retail space in government-owned housing. In July the Hong Kong Court of Final Appeal ruled the privatisation could go ahead.
Hong Kong is hoping to attract money to REITs that have been going to other Asian cities by allowing property to be owned outside the city, and the trusts to gear-up on debt to 45 per cent of the value of assets.
The IPO is expected to be a catalyst for more REITs in Hong Kong. Already Australia’s Macquarie Goodman is acquiring assets in Hong Kong and may introduce a Hong Kong REIT early in 2006.
The company is already involved in the Singapore REIT market with local property group Ascendas. The Ascendas Real Estate Investment Trust (A-REIT) is hoovering up business parks and industrial properties in Singapore.
The aim of A-Reit is to build a portfolio of quality business parks (including science parks); light and hi-tech industrial properties; and distribution and logistics centres. The attraction of Singapore is its position as a trade hub between India and China.
Leslie Chua, a Singapore-based research director for Jones Lang LaSalle, says a lot of money is coming into Singapore from both these markets. ‘The monetisation of assets is a very new concept in this part of the world,’ Chua says. ‘We don’t have an LPT history like you do in Australia.’
The real estate investment trust market only kicked off in 2001. He says the local market is different from Australia because investors are treating REITs more like equity than a fixed-income investment.
This means volatility in the market. ‘So even though your price of your units may shift up, that inevitably affects your returns,’ Chua says. ‘Returns have now compressed so much one would be wondering whether [you] should … be involved in the REIT market because it is becoming a bit speculative.’
The problem is that institutional investors want to buy into REITs for a guaranteed return as part of a portfolio strategy. The REITs need to maintain an attractive yield but as unit prices increase, the dividend yield decreases.
Chua says one way to increase dividend yield is to acquire more assets. Explains Chua: ‘It’s like a feeding frenzy.’
Rents
Average prime gross effective rents as at June 2005
   $/ sq m  3 mths to Q2, 2005  12 mths to Q2, 2005
Sydney CBD1Â Â 479Â Â 0.0%Â Â -1.2%
Melbourne CBDÂ Â 318Â Â 1.9%Â Â 2.3%
Brisbane CBDÂ Â 323Â Â 6.3%Â Â 17.5%
Adelaide CBDÂ Â 220Â Â 2.8%Â Â 10.0%
Perth CBDÂ Â 291Â Â 0.3%Â Â 7.0%
Canberra Civic  290  1.0%  2.8%
Commerical property in Australia — source Ibis World
Year  Revenue growth  Number of enterprises  Industry employment  Industry
risk level
1999-00Â Â 4.8Â Â 76,000Â Â 23,534.00Â Â N/a
2000-01Â Â 3.4Â Â 76,495Â Â 23,700.00Â Â N/a
2001-02Â Â 1.0Â Â 76,945Â Â 23,800.00Â Â Medium-low
2002-03Â Â 2.0Â Â 76,895Â Â 24,000.00Â Â Medium-low
2003-04Â Â 4.0Â Â 77,347Â Â 24,600.00Â Â Medium-low
2004-05  3.0  N/a  N/a  Medium-low
Compound average growth  3.03  0.44  1.12  N/a
Forecast for
2005-06
3.5  N/a  N/a  Medium
This article was written by Ed Charles, a freelance writer.