1. No category

Savills Research
Australian Capital Territory
Spotlight
Canberra Office
April 2015
Highlights
 The Canberra market increased in size by 1.9%
 Negative absorption of 21,765 square metres was

 Savills recorded office transactions totalling

throughout 2014; the largest increase nationally
In the 12 months to March 2015, Savills identified
47,557 square metres of leasing activity in the
Canberra office market
According to the latest numbers from the PCA, the
current vacancy rate in Canberra is 15.4%
recorded in the 12 months to December 2014

approximately $206 million in the 12 months to
March 2015
Indicative A Grade office yields in Canberra Civic
currently range from 7.00% to 8.50%
Savills Research | Canberra Office
April 2015
Savills Australian Capital Territory Team
Research
Managing Director
Divisional Director
Simon Hemphill
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[email protected]
Sales & Leasing
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Theo Dimarhos
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Rebecca Jakubaszek
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John Mackenzie
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Managing Director
Phil Harding
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Capital Transactions
Divisional Director
Ian Hetherington
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Property Manager
Alison Majdandzic
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Mitchell Thomas
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2
Savills Research | Canberra Office
April 2015
Introduction
The Canberra office market consists of just over 2.393 million square metres of net lettable
space, split into 26 sub-localities. The largest locality is Civic with 687,950 square metres.
By grade quality, A Grade buildings account for the largest proportion of stock in Canberra,
representing 45 percent of the market. The performance of the Canberra office market is
often counter-cyclical to the other major office markets in Australia, and has historically
been driven by elections and subsequent fluctuations in the size of the public sector.
Office Development
According to the latest Property Council of Australia (PCA) figures, a total of 74,355 square
metres of new and refurbished stock was added to the Canberra market throughout 2014.
However, during the same period, a total of 27,778 square metres of stock was withdrawn
from the market, resulting in total net supply of 44,577 square metres.
Two projects reached completion during the second half of 2014; namely the full
refurbishment of 2 Constitution Avenue, Forrest (20,014 square metres) and the new
addition of 1 Canberra Avenue, Civic (24,047 square metres).
Current Canberra Office Development Activity
Property
Precinct
NLA (sq m) Type
Status
Completion Major Tenant(s)
Gozzard Street – Stage 2
Gungahlin
9,000
New
Construction
2015
50 Blackall St
Barton
4,727
Refurb
Construction
2015
10-12 Lonsdale St
Braddon
1,745
New
Construction
2015
63-67 Constitution Ave
Campbell
1,500
New
Construction
2015
216 Northbourne Ave
Braddon
1,200
Refurb
Construction
2015
63-67 Constitution Ave – Stage 2
Campbell
1,200
Refurb
Construction
2015
Keltie St
Phillip
600
Refurb
Construction
2015
Section 96
Civic
37,000
New
DA Approved
Mooted
Gozzard Street – Stage 2
Gungahlin
2,250
New
DA Approved
Mooted
68-72 Northbourne Ave
Civic
52,000
New
DA Applied
Mooted
Source: PCA / Savills Research
NOTE: As a result of a re-grading exercise by the PCA in the first half of 2010, the overall stock level for Canberra,
excluding project completions, increased by 4.7 percent.
Following on from a flurry of construction activity in the Canberra market in recent years,
2015 is set to deliver just less than 20,000 square metres of new and refurbished stock to
the market. This is one of the lowest levels of stock supply for the market over the last
decade. Indeed, in the last eight years alone, the Canberra office market has grown by an
average of 4.8 percent per annum.
Beyond 2015 there are a couple of large scale projects in the supply pipeline that, given the
current soft leasing conditions, would require significant pre-commitment before
commencing construction. As such these projects are merely considered as long-term
future planning.
savills.com.au/research
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Savills Research | Canberra Office
According to the latest figures
from Deloitte Access
Economics, White Collar
Employment (WCE) is forecast
to grow on average by just 0.4
percent per annum for the next
ten years. However, the current
forecast for FY14/15 is
considerably lower than this at
-3.1 percent. Indeed, the
forecast for the two following
financial years indicates that
total WCE in Canberra will
shrink by a further 3.1 percent,
a loss of more than 3,300 white
collar jobs.
Assuming a continuation of the
close correlation between
White Collar Employment and
net absorption, this data
suggests that net absorption
will decline in Canberra over
the medium-term.
However, there is some light at
the end of the tunnel following
on from this period of negative
WCE growth. Commencing
FY17/18, the Canberra
economy is expected to start
once again adding white collar
employees, with growth
expected to average 1.5
percent per annum until the
end of the current forecast
period in 2024.
Any increase in tenant demand
for office space during this
period will be satisfied by the
existing stock in the market,
given the current availability of
quality A Grade space in
Canberra.
April 2015
Canberra Office
Forecast Gross Office Supply by Type (sq m)
2015 to 2017+
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2015
New
2016
Full Refurb
2017+
Mooted
Partial Refurb
Source: PCA / Savills Research
Canberra Office
White Collar Employment vs Net Absorption
1994 to 2017
14%
12%
Forecast
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Annual Increase in WCE (%)
Net Absorption (% of Market)
Source: Deloitte Access Economics / Savills Research
Savills notes that these numbers were released post the 2014 Federal
Budget.
savills.com.au/research
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Savills Research | Canberra Office
April 2015
Leasing Activity
In the 12 months to March 2015, Savills recorded 47,557 square metres of leasing activity in
the Canberra office market. This is 50 percent down on the 12 months prior, and is
significantly down on the five year average (71,300 square metres). The majority of these
leases (68 percent of space) occurred in the Non-Civic precinct.
Select Canberra Office Leases to March 2015
Date
Property
Area
(sq m)
Rent
Tenant
($/sq m)
May-14
10 Moore St, City
2,278
375 G
Optus
Jun-14
44 Sydney Ave, Barton
3,437
390 G
Dept. of Foreign Affairs & Trade
Aug-14
53 Wentworth Ave, Kingston
3,916
436 G
Lockheed Martin
Sep-14
121 Marcus Clarke St, City
2,570
430 G
Myer Vandenburgh
Sep-14
2 Phillip Law St, City
1,184
535 G
Servcorp
Oct-14
28 Sydney Ave, Forrest
2,541
450 G
IBM Australia
Dec-14
Atlantic St, Phillip
16,499
365 G
Department of Health
Dec-14
70 Kent St, Deakin
1,040
395 G
SAP
Jan-15
1 Canberra Ave, Forrest
20,000
na
Mar-15
40 Allara St, Canberra
3,038
365 G
Source: Savills Research
na = not currently available
Negative absorption totalling
21,765 square metres was
recorded for the 12 months to
December 2014, representing
0.9 percent of the Canberra
office market. This is the first
period of negative absorption
in the Canberra market since
December 2008. Indeed, this is
only the second 12 month
period of negative absorption
in Canberra since June 1997.
Significantly, the majority of
this negative absorption was
recorded in secondary stock. In
fact positive absorption of
9,407 square metres was
recorded for A Grade stock,
whilst negative absorption of
31,172 square metres was
recorded in secondary grade
buildings.
This prolonged period of
positive net absorption has not
necessarily been positive for
the Canberra office market.
Indeed, the previous market
trend of larger tenants moving
to purpose built facilities and
leaving behind large pockets of
backfill space has had a
profoundly negative effect on
the overall vacancy rate in the
market.
Department of Finance
Department of Foreign Affairs & Trade
*Sublease **Renewal ***Assignment
Canberra Office
Canberra Net Absorption (sq m)
Dec-04 to Dec-14
300,000
250,000
200,000
150,000
100,000
50,000
0
-50,000
-100,000
Total Absorption (sq m)
Source: PCA / Savills Research
Linear (Total Absorption (sq m))
We note confirmation in the 2014 Commonwealth Budget that
employment levels in the Commonwealth Public Service will be reduced
over the Forward Estimate period.
The Government is indicating that up to 16,500 public sector positions
will be terminated over the period. Given that approximately 40 percent
of the Commonwealth Public Service is located in Canberra, it is
inevitable that employment in the Commonwealth Public Sector in
Canberra will reduce over the forthcoming two to three years.
savills.com.au/research
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Savills Research | Canberra Office
April 2015
Some of the factors affecting demand in the Canberra office market include the movement
of Commonwealth tenants into new ‘Green’ buildings, the Department of Finance policy
reducing work space ratios in the Public Service (with much of any new demand satisfied
by the resultant sublease space), the ‘Efficiency Dividend’ policies in the 2012, 2013 and
2014 Commonwealth Government Budgets, and the general reduction in Commonwealth
Government activity having a flow-on effect to private sector businesses that rely on
Government work. The fall in jobs, mainly concentrated in the public sector, is reflected in
the high vacancy rate.
Of the 47,557 square metres leased in Canberra in the last 12 months, the 'Government and
Community' sector was the dominant sector, leasing 54 percent of the stock, or 25,613
square metres. Similarly, the largest number of transactions was through the 'Government
and Community' sector (6).
Canberra Office
Total Reported Leased in Canberra (%)
12 months to Dec-14
Undisclosed
0%
W'Sale, Retail
0%
Govt & Community
54%
Recreational
Services
Finance and
0%
Insurance
0%
Mining & Utilities &
Industry
18%
Property & Business
Services
13%
Source: Savills Research
IT & Communication
15%
Whilst the ‘Government & Community’ sector still remains the dominant sector in the
Canberra leasing market, the current share of market activity over the last 12 months of 54
percent compares to a rate of 70-80 percent during previous years, supporting the view that
Government leasing activity in Canberra has reduced significantly during the past 12
months.
Gross face rents in Canberra Civic as at March 2015 typically range from $405 to $475 per
square metre per annum for A Grade buildings, and between $365 and $400 per square
metre per annum for secondary grade buildings. The average A Grade gross face rent is
currently $440 per square metre per annum; a 1 percent increase over the last 12 months.
A Grade rents and incentives have until recently remained relatively stable during some of
the toughest market conditions in recent history. Rents for new buildings with extremely
high specifications are maintaining the upper level for new A Grade premises. However, it is
now evident that as the level of demand continues to fall; face rents for older existing A
Grade premises are coming under pressure. It is also clear that a degree of volatility is
emerging in the level of incentives being offered in this market sector. Incentives are varied,
dependent on whether or not there is an existing fit-out, the quality of the fit-out, the size
and quality of the specific building, and the level of competition for tenants in the immediate
area. There has however been a noticeable increase in the general level of incentives across
the market in the last 12 months.
The outlook for secondary buildings in Canberra continues to remain depressed. The
disparity in the quality of accommodation between A Grade and secondary grade stock
continues to widen, and this combined with the low level of overall demand, is placing
continued pressure on incentives and effective rents in the secondary market sector.
savills.com.au/research
6
Savills Research | Canberra Office
April 2015
Paradoxically, the widening gap between rents for A Grade and secondary grade buildings,
and current budgetary constraints on Commonwealth Departments are creating increasing
opportunities for owners of secondary grade buildings to retain existing tenants. Anecdotal
evidence suggest that there are more instances where Commonwealth Government tenants
are renewing leases in well located, older buildings (subject to significant refurbishments
and incentives) due mainly to a lack of funding for higher rents, and for fit-out costs in new
premises.
Vacancy
According to the latest PCA figures, the current composition of the market is as follows:
Canberra Vacancy Rates – December 2014
Grade
Stock (sq m)
Vacancy (sq m)
Vac % Dec-14
Vac % Dec-13
A Grade
1,075,236
169,181
15.7
12.9
B Grade
511,986
58,282
11.4
12.7
C Grade
707,633
122,703
17.3
11.9
D Grade
98,819
18,330
18.5
20.3
2,393,674
368,496
15.4
12.9
Total
Source: PCA / Savills Research
The overall vacancy rate in the Canberra continues to climb and has now reached the
highest level ever recorded of 15.4 percent. Canberra now has the second highest vacancy
rate of any of the major office markets in Australia, according to the latest PCA figures.
We are now starting to witness the full impact of the move by tenants over the past few
years from older buildings into “Green” credentialed buildings constructed during the recent
development phase, and the impact of low levels of Commonwealth Government leasing
activity. This upward trend is almost certainly likely to continue into the medium-term.
Canberra Office
Canberra Vacancy by Grade (%)
Dec-04 to Dec-14
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
Prime Vacancy (%)
Secondary Vacancy (%)
Total Vacancy (%)
Source: PCA / Savills Research
Significantly, vacant sublease space has increased from 10,000 square metres in December
2012 to just under 40,000 square metres as at December 2014, with the bulk of this vacant
space in Government leased buildings. Following from the further cuts to the Public Service
announced in the 2014 Budget, it is certain that sublease vacancies will continue to climb in
the short to medium-term.
savills.com.au/research
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Savills Research | Canberra Office
April 2015
Sales Activity
Savills has recorded approximately $206 million of office transactions in the 12 months to
March 2015 in Canberra. This is significantly down from $441 million in the previous year,
however, just 15 percent down on the five year average. During the same period a total of 8
properties were transacted, down from the previous period of 12.
Canberra Office Sales to March 2015
Date
Property
Price ($m)
NLA
(sq m)
Price
$/sq m
Yield (%)
Feb-14
26 Brisbane Ave, Barton
13.50
2,837
4,758
7.95*
May-14
186-200 Reed St, Tuggeranong
25.81
5,403
4,776
7.85*
Aug-13
205 Anketell St, Tuggeranong
10.25
6,831
1,501
11.50*
Jun-14
10 Moore St, City
18.00
6,701
2,686
10.15*
Jul-14
21-23 Marcus Clarke St, City
45.01
7,503
5,999
7.35*
Jul-14
36-38 Sydney Ave, Forrest
35.50
9,098
3,902
na
Dec-14
217 Northbourne Ave, Turner
11.45
3.006
3,809
na
Mar-15
44 Sydney Ave, Canberra
32.00
9,977
3,207
9.25*
Source: Savills Research
* equated yield
represents 100 percent of NLA
#
Market yields in Canberra Civic as at March 2015 typically range from 7.00% to 8.50% for A
Grade buildings, and between 8.75% and 11.00% for secondary grade buildings. The
average A Grade yield is currently 7.75%; there has been no change over the last 12
months.
Canberra Office
Office Sales ($m and number)
(>$5m) Mar-05 to Mar-15
$1,600
30
$1,400
25
$1,200
20
$1,000
$800
15
$600
10
$400
5
$200
$0
0
Sales >$5mill (LHS)
Sales No (RHS)
Source: Savills Research
Capital values in Canberra Civic as at March 2015 typically range from $4,765 to $6,786 per
square metre for A Grade buildings, and between $3,318 and $4,571 per square metre for
secondary grade buildings. Average capital values for A Grade buildings are currently
$5,677 per square metre; a 1 percent increase over the last 12 months.
savills.com.au/research
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Savills Research | Canberra Office
The 'Fund' purchaser category
was the most active in the
investment market for the year
ending March 2015, accounting
for 59 percent of the stock sold
(or $121 million worth of office
transactions). Similarly the
'Fund' category had the most
transactions (4).
As a result of the sustained
level of interest in prime
Australian property from
international investment funds,
Savills anticipates that yields
for prime quality assets in
Canberra, especially those
subject to a long WALE and
protected income streams, will
remain strong over the shortterm, despite the soft leasing
conditions.
April 2015
Canberra Office
Office Sales Buyer Profile (%)
12 months to Mar-15
Syndicate
0%
Foreign Investor
17%
Developer
0%
Private Investor
24%
Government
0%
Trust
0%
Owner Occupier
Undisclosed
0%
0%
Fund
59%
Source: Savills Research
Key Market Indicators – March 2015
Civic – A Grade
Civic – B Grade
Low
High
Low
High
Low
High
Low
High
Rental – Gross Face ($/sq m)
405
475
365
400
400
480
335
395
Rental – Net Face ($/sq m)
328
390
283
305
328
398
258
303
Rental – Net Effective ($/sq m)
252
299
210
226
252
306
184
216
Outgoings – Operating ($/sq m)
55
60
60
70
55
60
60
70
Outgoings – Statutory ($/sq m)
22
25
22
25
17
22
17
22
Outgoings – Total ($/sq m)
77
85
82
95
72
82
77
92
Typical Lease Term (years)
5
15
3
10
5
15
3
10
Yield – Market (% Net Face Rental)
7.00
8.50
8.75
11.00
7.00
8.50
8.75
11.50
IRR (%)
8.75
9.50
9.50
10.50
9.00
9.75
9.75
11.00
Cars Permanent Reserved ($/pcm)
250
350
250
350
150
215
150
215
4,765
6,786
3,318
4,571
4,706
6,857
2,913
4,514
Office Component Capital Values ($/sq m)
Non-civic - A Grade Non-civic - B Grade
Source: Savills Research
Rental rates reflect single, whole floor, net effective and mid-rise rental rates unless
specifically otherwise stated. Discounts and premiums exist for low and high rise space and
for significant occupiers.
savills.com.au/research
9
Savills Research | Canberra Office
April 2015
Outlook
The Canberra office market is now at the end of a period of robust levels of stock additions,
which has been the trend for a number of years. Despite equally remarkable net absorption,
the flight to quality by large space users and a reduction in Commonwealth Government
leasing activity has maintained upward pressure on the overall vacancy rate, which now sits
at historically high levels.
Office demand in Canberra has been impacted by not only the general flow-on effects of
the financial crisis, but also by reduced Commonwealth Government activity in recent years,
staff reductions in the Public Sector due to ‘Efficiency Dividends’ imposed on departments,
new policy reducing work space ratios in the Public Service, as well as new requirements
on Commonwealth tenants to meet certain ‘Green’ credentials in their tenancies.
The previously strong performing Civic A Grade market recorded a vacancy rate of 11.1
percent; this is due, at least in part, to the addition of vacant space over the last 12 months.
However, the Tuggeranong and Belconnen Town Centres remain relatively strong, with sub10 percent vacancy rates. The A Grade market in the Barton/Forrest precinct and the
Canberra Airport; and the B Grade market in the CBD and Woden Town Centre are all
experiencing high vacancy rates. We anticipate that these conditions will remain in place
well into 2015.
Following the Commonwealth Government Budget in May 2014, Savills expect a further
softening in demand from the Commonwealth. Announcements by the Coalition
Government that it will make significant reductions in the size of the Commonwealth Public
Service are creating an atmosphere of caution and uncertainty in the Canberra market.
Rents for A Grade stock have until now been maintained at a stable level, although there is
an emerging threat to face rental levels, and an emerging volatility in the level of incentives
on offer for this class of property. Rents for secondary grade stock are forecast to continue
to be under pressure during 2015, with upward pressure on the level of incentives required
to secure tenants for this class of property.
The current low level of demand from purchasers of secondary grade stock is expected to
continue, with the potential for a softening of yields for this class of property, especially
where vendors come under pressure to sell. However, interest in A Grade stock, especially
those subject to long-term leases to the Commonwealth, will remain strong, with almost no
stock available for sale.
savills.com.au/research
10
Savills Research | Canberra Office
April 2015
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