m3commentary - m3property Strategists .| P1 Key Research Contacts: m3commentary MELBOURNE CBD OFFICE

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  • | P1www.m3property.com.au

    Key Research Contacts:

    m3commentary MELBOURNE CBD OFFICE

    Autumn | 2017

    m3property.com.au

    Jennifer Williams

    National Director | NSW

    (02) 8234 8116

    Casey Robinson

    Research Manager | QLD

    (07) 3620 7906

    Erin Obliubek

    Research Manager | VIC

    (03) 9605 1075

    Zoe Haskett

    Research Manager | SA

    (08) 7099 1807

  • | P2www.m3property.com.au

    m3property Research

    Market Overview 3

    Key Influences 4

    Key Indicators 5

    Significant Sales 7

    Outlook 8

    CONTENTS

    Sales activity was healthy in the twelve months to

    March 2017, albeit below the year prior;

    Prime yields continued to compress while

    secondary yields stabilised over the year to March

    2017;

    Supply levels increased in the second half of

    2016, however, new supply will be limited in 2017

    with just one significant project expected to

    complete;

    Leasing conditions improved towards the end of

    2016 and set to strengthen further in 2017;

    The CBD vacancy rate declined in January 2017,

    driven by a combination of stock withdrawals and

    improved leasing conditions; and

    Prime effective rental growth of 8.9% was

    recorded in the twelve months to March 2017.

    TENANT DEMAND

    STRENGTHENS IN

    THE MELBOURNE

    CBD OFFICE

    MARKET

    DEFINITIONS

    A-REIT: ASX listed Australian Real

    Estate Investment Trust

    Completion date: determined by issue

    of a Certificate of Occupancy

    Grade: is determined using the PCA

    report A Guide to Office Building

    Quality.

    Net absorption: is the change in

    occupied stock within a market over a

    specified period of time.

    Net lettable area (NLA): defined in

    accordance with the PCA Method of

    Measurement

    Pre-commitment: contract signed to

    occupy space in new or refurbished

    space prior to construction commencing.

    Prime: Combination of premium and

    grade A.

    Secondary: Combination of grades B, C

    and D.

    WALE: Weighted average lease expiry.

    m3commentary Autumn 2017

  • | P3www.m3property.com.au

    Market fundamentals remain positive for the Melbourne CBD office market leading into

    2017, with both state economic growth and business confidence above the national

    average. The sector experienced improved levels of tenant demand over the year to

    March 2017. This, combined with limited new supply and stock withdrawals, contributed

    to the Melbourne CBD office vacancy rate declining in January 2017. In turn, effective

    rental growth was recorded in the March 2017 quarter as incentives start to trend down

    from historical highs. Yields continued to tighten over the past year for core assets, with

    the spread between government bonds and prime yields considered wide compared to

    the long-term average.

    Melbournes diverse range of sectors and office users remain

    a key driver of low unemployment and white collar

    employment for the State, with Melbournes unemployment

    rate 6.1% in the month of February 2017.

    Tenant demand improved over the twelve months to March

    2017, driven by the migration of tenants from suburban and

    city fringe locations and strong demand from the IT, Financial

    and Government sectors.

    Supply levels improved over the second half of 2016.

    However, new supply in the Melbourne CBD office market will

    be limited in 2017 with 14,246 square metres to be

    completed.

    The CBD vacancy rate declined from 7.0% to 6.4% over the

    period July 2016 to January 2017, driven by a combination of

    stock withdrawals and improved leasing conditions.

    Investment activity in the Melbourne CBD office market

    waned over 2016 driven by a lack of stock available to the

    market.

    MARKET OVERVIEW

    m3property Research

    121 Exhibition Street (SX1) &

    111 Bourke Street (SX2)

    m3commentary Autumn 2017

  • | P4www.m3property.com.au

    ECONOMIC GROWTHGross Domestic Product (GDP) grew by 2.4% during 2016. Strongest growth was

    recorded in the Mining, Agriculture, Forestry and Fishing; and Professional, Scientific and

    Technical Services sectors. Victoria State Final Demand, a key indicator of the health of

    the states economy, grew by 3.4% during 2016. Economic growth in Victoria is forecast to

    outperform national economic growth over the long-term.

    EMPLOYMENTIn the year to February 2017 Victoria added over 95,000 jobs, compared to the year prior,

    with most of the growth occurring towards the end of 2016. Although Victorias seasonally

    adjusted unemployment rate increased in the month of February to 6.1%, the

    underemployment rate declined by 0.2 percentage points. The IT, Finance and Insurance

    sectors remain the main drivers of white collar employment in the State.

    CASH RATE AND GOVERNMENT BOND RATESThe Reserve Bank of Australia (RBA) has lowered the official cash rate by 75 basis points

    over the past two years, with the most recent reduction (1.50%) being in August 2016. The

    low cost of debt remains a key driver of investor demand for commercial property assets.

    Historically low returns on government bonds have also encouraged strong demand for

    property during recent years. However, its anticipated the gap between government

    bonds and commercial yields will compress in 2017 as bond yields commence to rise.

    BUSINESS CONFIDENCEThe National Australia Banks monthly business survey remained strong at 7 index points

    in February 2017 (0 = neutral). This is above the long-term average for business

    confidence and remains favourable for future economic growth. Business confidence in

    Victoria remained above the national average at 14 index points. Confidence is a driving

    force behind tenant decisions to relocate, expand or contract.

    EXCHANGE RATEWhile the value of the exchange rate has increased over the past year, it remains

    considerably lower than it was between mid-2009 and mid-2015, when it didnt fall below

    80 cents. The lower value has been a driving force behind strong investment demand from

    foreign investors.

    KEY INFULENCES

    m3property Research

    575 Bourke Street, Melbourne520 Bourke Street, Melbourne

    $

    m3commentary Autumn 2017

  • | P5www.m3property.com.au

    TENANT DEMAND

    Despite the lack of stock available to the market in 2016,

    tenant demand in the Melbourne CBD office market

    strengthened over the second half of 2016. Net absorption in

    the six months to January 2017 up 7,641 square metres.

    Prime stock accounted for over 75% of positive net absorption

    in the year to January 2017. This is consistent with the market

    experiencing a rise in tenant enquiry for prime CBD office

    space, with several tenants seeking to secure lease

    agreements given the current lack of prime stock available.

    Although tenant demand is expected to remain strong over the

    short term, demand is anticipated to soften in the second half

    of 2017 as tenants pre-commit to new builds forecast to

    complete in 2018 and 2019.

    KEY INDICATORS

    STOCK AND SUPPLY

    Total stock in the Melbourne CBD office market increased over

    the second half of 2016 to 4,526,062 square metres. New

    supply to enter the market included, Walker Corporations

    Tower 2 (55,000 square metres) and Tower 4 (34,357 square

    metres) at 727 Collins Street. The partial refurbishment of 485

    La Trobe Street completed late 2016, with Salmat committing

    to 8,400 square metres across eight floors of the offices south

    tower. The partial refurbishment and expansion of 360 Collins

    Street completed in 2016, with the expansion adding an

    additional 5,698 square metres of office space to the existing

    39,608 square metre tower.

    New supply will be limited in 2017 with 14,246 square metres

    expected to complete. The partial redevelopment of Rialto

    Towers at 525 Collins Street will result in an additional 6,500

    square metres of commercial space entering the market in the

    first half of 2017, of which the majority is pre-committed to

    Bank of Melbourne, and 5,500 squares metres of refurbished

    space leased to various tenants. While 107-109 Flinders Lane

    (1,326 square metres) and 95 Queen Street (1,420 square

    metres) are expected to complete full refurbishments.

    m3property Research

    818 Bourke Street, Melbourne50 Franklin Street, Melbourne

    -40

    -20

    0

    20

    40

    60

    80

    100

    120

    Net

    ab

    so

    rpti

    on

    (000's

    m2)

    Melbourne CBD Office Net Absorption -January 2017

    Source: Property Council of Australia OMR, m3property Research

    Western Core35%

    Eastern Core14%

    Docklands20%

    Civic10%

    North Eastern8%

    Flagstaff7%

    Spencer6%

    Melbourne CBD Office Stock - January 2017

    Source: Property Council of Australia OMR, m3property Research

    m3commentary Autumn 2017

  • | P6www.m3property.com.au

    INVESTMENT MARKET AND YIELDS

    Investor activity in the Melbourne CBD slowed in the twelve

    months to March 2017 with approximately $1.3 billion worth of

    office stock traded. Transactional activity was below the

    previous years total of $2.9 billion.

    Significant transactions to occur the past twelve month