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Savills Research
Western Australia
Spotlight
Perth CBD Office
April 2015
Highlights
 Savills recorded approximately


54,026 square metres of CBD office
leasing activity in the 12 months to
March 2015
Prime Full Floor immediate availability
has stabilised over the last 12 months
at 97 floors as at February 2015
The business and finance sectors
reportedly leased the greatest
amount of space at 31,446 square
metres in the last twelve months
 A number of options are available in


the market for tenants seeking whole
floor, prime quality space
Savills has recorded approximately
$133 million worth of office
transactions in the year to March
2015
Softening effective rents and rising
incentives are favouring tenants in the
current leasing market
Softening
effective rents &
rising incentives
favoring tenants
in current
leasing market
Savills Research
Savills Research | Perth CBD Office
April 2015
Savills West Australia Team
Research
Managing Director
National Head
Tony Crabb
+61 (0) 3 8686 8012
Managing Director
Paul Craig
+61 (0) 8 9488 4156
[email protected]
[email protected]
Leasing
Property Management
Divisional Director
Graham Postma
+61 (0) 8 9488 4153
Divisional Director
Jason Ridge
+61 (0) 8 9488 4118
[email protected]
[email protected]
Investment Sales
Valuation & Consultancy
Divisional Director
Miles Rowe
+61 (0) 8 9488 4116
Divisional Director
Mark Foster-Key
+61 (0) 8 9488 4145
[email protected]
[email protected]
Project Management
General Manager
Graham Nash
+61 (0) 8 6271 0306
[email protected]
Savills West Australia
Level 27, 108 St Georges Terrace
Perth, WA 6000 Australia
+61 (0) 8 9488 4111
savills.com.au
savills.com.au/research
2
Savills Research | Perth CBD Office
April 2015
Introduction
The Perth CBD office market currently contains1.6 million square metres of lettable space.
Of this, over 58% at 930,000 square metres is of Prime (Premium and A Grade) quality and
the balance (670,000 square metres) Secondary Grade.
Throughout this document rental rates reflect a net effective rent on a single, whole floor in
the mid-rise of a building unless specifically otherwise stated.
Office Development
Soaring rents and declining vacancy that came as a result of the mining boom in 2011 saw
the activation of a new development cycle in the Perth CBD. There are currently nine
buildings under construction (including refurbishments) totalling almost 207,000 square
metres of space. Of these developments all but one are due for completion in 2015; with
Capital Square being scheduled for completion in 2018.
Perth Office
CBD Forecast Gross Office Supply by Type (sq m)
2015 to 2022
160,000
Well over half
of the CBD’s
office space is
of Prime
quality grade
140,000
120,000
100,000
80,000
60,000
Savills Research
40,000
20,000
0
2015
2016
Precommitment
2017
New
2018
2019
Mooted
2020
Refurb
2021
2022
Backfill
Source: Savills Research
Total CBD office stock recently increased 10,947 square metres as a result of the completion of the nine-level 863
Hay Street development. Due to uncertain market conditions and the large amount of stock scheduled for
completion it is unlikely that the city will see construction of any more new developments in the short to medium
term; it is forecast to take some time for the market to fully absorb and adjust to the 2015 stock additions, and only
once this has occurred is it likely that the next development cycle commences unless a significant precommitment is
secured.
Beyond 2015 there is just one building under construction; 55,000 square metres at Capital Square due in 2018;
beyond 2018 there are a number of mooted developments including those in the Elizabeth Quay, City Link and
Waterbank precincts. Perth may see several of smaller developments over the next six years, but a new
development cycle is unlikely to get underway before 2020 when we may see the likes of Chevron’s new
headquarters at Elizabeth Quay.
savills.com.au/research
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Savills Research | Perth CBD Office
April 2015
Current Perth CBD Office Development Activity
Property
Precinct
NLA (sq m)
Type
Status
May Holman - 32 St Georges Tce
Mid CBD
14,895
Refurb
UC
Mar-15
Legal Aid
999 Hay St
West CBD
10,800
New
UC
Mar-15
GHD
Treasury Building - St Georges Tce
Mid CBD
30,219
New
UC
Jun-15
State Government
Kings Square 1 - Wellington St
West CBD
23,000
New
UC
Jun-15
Kings Square 2 - Wellington St
West CBD
19,000
New
UC
Jun-15
Shell
Kings Square 3 - Wellington St
West CBD
8,000
New
UC
Jun-15
Leighton / John Holland
Kings Square 4 - Wellington St
West CBD
13,000
New
UC
Jun-15
HBF
Brookfield South - 123 St Georges Tce
West CBD
32,000
New
UC
Dec-15
Delloitte, Corrs, Brookfield
Capital Square - 98 Mounts Bay Rd
West CBD
55,000
New
UC
Jun-18
Woodside
Source: Cordells / Savills Research
DA: Development Approval
EP: Early Planning
Completion Major Tenant
UC: Under Construction
Leasing Activity
Following a relatively quiet 2013,
leasing activity and enquiry 2014
remained subdued. In the 12
months to March 2015, Savills
recorded 54,026 square metres of
leasing activity in the Perth CBD
office market. This is down 53
percent on the 12 months prior,
and down on the five year average
of 117,683 square metres. The
majority of these leases
(approximately 63 percent of
space leased) were in the West
CBD precinct. It is to be noted that
24 percent of the deals reported in
this period were renewals for
existing tenants, while a further 17
percent were subleases.
leasing activity in the area.
Of the 54,026 square metres
reported leased in Perth CBD in
the last 12 months, the ‘Mining’
sector was the dominant sector
leasing 38 percent of the stock, or
23,431 square metres, followed by
the ‘Property & Business Services’
sector which accounted for a
further 27 percent of deals done.
In the 12 months to March 2015
‘Direct’ leases accounted for the
majority of office space reported
leased in the Perth CBD office
market comprising 31,703 square
metres or 59 percent of reported
Softening face rents and
increasing incentives are creating
conditions that favour tenants,
resulting in a flight to quality as
companies negotiate better deals
and upgrade their space.
Incentives are now at a level which
will substantially (if not fully) cover
tenants’ fit-out costs.
A selection of recent leasing
transactions is displayed in the
table below.
Select Perth CBD Office Leases to March 2015
NLA (sq m)
Rent
($/sq m)
233 Adelaide Terrace
1,049
470
Superpartners
Oct-14
140 St Georges Terrace
1,055#
660
Bechtel
Oct-14
140 St Georges Terrace
1,106
660
Halliburton
Oct-14
221 St Georges Terrace
737
600
Environmental Resources
Nov-14
140 St Georges Terrace
557
655
HBA Legal
Nov-14
140 St Georges Terrace
428
705
PPB Pty Ltd
Nov-14
221 St Georges Terrace
225
595
Swift Technical
Dec-14
44 St Georges Terrace
234
695
Conglin International Investments
Dec-14
22 Mount St
525
350
AAIG
Dec-14
218 St Georges Terrace
640
475
Civica
Date
Property
Oct-14
Source: Savills Research
*sublease
Tenant
# renewal
savills.com.au/research
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Savills Research | Perth CBD Office
April 2015
CBD net face
rents have
been
decreasing
since mid-2012
Perth Office
Total Reported Leased in Perth CBD (%)
12 months to Mar-15
Finance and
Insurance
23%
IT &
Communication
1%
Property &
Business services
27%
Savills Research
Mining & Utilities &
Industry
38%
Source: Savills Research
Govt & Community
8%
Undisclosed
3%
Unlike other Australian CBD markets, Perth did not experience significant negative
absorption in the wake of the Global Financial Crisis; it was somewhat sheltered by the
booming resources sector. The driving factors behind the recent negative absorption
figures include the increase in sublease space available in the market, as some companies
downsize and reassess their accommodation needs in the wake of the slowdown in the
mining sector.
Since mid-2012 CBD rents have been subject to downward pressure as increasing vacany
and low enquiry levels impacted the market; face rents are expected to soften further during
2015 as a result of the significant supply additions due. Savills has recorded average
Premium Grade net face rents as at March 2015 at $715 to $800 per square metre, whilst A
Grade range from $575 to $750 and B Grade $395 to $525. As well as softening face rents,
incentives have been on the rise. As at March 2015 incentives across all grades in the CBD
were recorded at 25 to 30 percent - the highest level recorded since 2006.
savills.com.au/research
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Savills Research | Perth CBD Office
April 2015
Office Vacancy
Office vacancy in the Perth CBD
increased 5.8 percentage points over
2014 to 14.8 percent at January
2015. Vacancy increased as a result
of subdued tenant demand and a
number of businesses re-evaluating
their staffing and accommodation
needs. The rise in vacancy was
experienced in both prime and
secondary assets; indeed all grades
of office accommodation experienced
an increase in vacant space over the
year, albeit with the lower grades
experiencing the largest increases
demonstrating the flight to quality that
is resulting from the market turning in
tenants favour.
Subdued rents and rising incentives
are providing a number of favourable
options for tenants in the current
market. While vacancy seems high for
Perth, is only marginally higher than
the national CBD vacancy rate of 11.2
percent. The increase in vacancy has
come almost entirely from direct
vacancy, with sublease vacancy only
increasing by 0.1 percentage points
in the 12 months to January.
Perth Office
CBD Vacancy by Grade (%)
Mar-05 to Mar-15
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Prime Vacancy
Source: Savills Research
Secondary Vacancy
Total Vacancy
New supply due in 2015 is expected
to increase vacancy further, with
vacancy expected to peak in late
2015 before the new supply is
gradually absorbed by the market
(beyond 2016). Demand conditions
are likely to improve as the effects of
reduced interest rates and
depreciating Australian dollar are felt
in the market, and while lease terms
continue to favour tenants.
Perth CBD Office Vacancy – January 2015
Grade
Stock (sq m)
Vacancy (sq m)
Vac % Jan-15
Vac % Jan-14
Premium
322,722
27,569
8.5
1.4
A Grade
627,142
95,022
15.2
10.2
B Grade
465,470
80,814
17.4
11.3
C Grade
201,662
32,483
16.1
12.3
D Grade
8,122
4,044
49.8
7.4
1,625,118
239,932
14.8
9.0
Total
Source: PCA/Savills Research
savills.com.au/research
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Savills Research | Perth CBD Office
April 2015
Full Floor Availability
In Savills’ Prime Full Floor Availability Report, the state of the leasing market is assessed in
a different manner to most vacancy surveys. The report graphically shows each Premium
and A Grade building in the city on a floor-by-floor basis highlighting which whole floors are
competing for tenants - both now and in the future - including those under construction and
refurbishment. Results from the February 2015 Prime Full Floor Availability Report are
detailed below.
Perth Full Floor Report – February 2015
By Grade
Total
Premium
847
222
West CBD
Mid CBD
East CBD
625
488
252
82
1,070,826
353,951
716,874
680,776
256,602
105,538
151
41
110
96
37
6
184,586
60,885
123,701
123,782
36,282
11,514
17.2%
17.2%
17.3%
18.2%
14.1%
10.9%
18
10
18
18
4
3
23,400
10,000
23,400
23,400
4,252
5,479
Total Prime Floors
Total Prime NLA (sq m)
Prime Floors Available (No)
Prime Full Floor Availability (sq m)
Prime Full Floor Availability (%)
Max Contiguous Floors (No)
Max Contiguous Floors (sq m)
By Sector
A Grade
Source: Savills Research
Compared to December 2013, the number of full floors available has increased slightly from
141 to 151 in February 2015. Of the 151 prime floors vacant 97 are available for immediate
occupation while the remaining 54 floors are in new developments or backfill space that will
become available at a future date. Of the 54 floors to become available in the future, 33 will
become available for occupation in the next six to 12 months.
Perth Office
Full Floors Available - Quarterly (%)
Dec-05 to Dec-14
6%
151 prime
whole prime
floors are
available for
lease in the
Perth CBD
4%
Savills Research
20%
18%
16%
14%
12%
10%
8%
2%
0%
Full Floor Vacancy
Linear (Full Floor Vacancy)
savills.com.au/research
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Savills Research | Perth CBD Office
April 2015
Sales Activity
After a record year of transactions in 2013, office sales in 2014 were somewhat restrained.
Savills have recorded approximately $133 million worth of office transactions in the 12
months to March 2015 in the Perth CBD area. This is down 91 percent from the acute high
of $1,541 million in the previous 12 months, and down on the five year average of $704
million. Over the past twelve months three properties were reported sold, down from the
previous year of 13, and down on the five year average of 11. There have only been two
transactions of great significance in 2014: the $35 million sale of 220 St Georges Terrace in
November, and the $91 million sale of 256 Adelaide Terrace in April.
Perth Office
CBD Office Sales ($m and number)
(>$1m) Mar-05 to Mar-15
$1,800
35
$1,600
30
$1,400
25
$1,200
$1,000
20
$800
15
$600
10
$400
$133m of
CBD office
stock sold in
the 12 months
to March 2015
Savills Research
5
$200
0
$0
Sales > $1m (LHS)
Sales No (RHS)
Source: Savills Research
Perth office stock has traditionally been purchased by domestic investors, yet is rapidly
growing in esteem with offshore buyers as demonstrated by two major transactions in of
2014. Offshore capital continues to look for opportunities in Perth due to its countercyclical nature with the eastern states allowing a level of diversification; Perth assets also
tend to be higher-yielding than those on the eastern seaboard. As a result of these factors
both domestic and foreign capital should continue to seek Perth assets with solid leaseexpiry profiles, however transactional activity is limited by a dearth of stock being presented
for sale.
Perth Office
CBD Office Sales Buyer Profile (%)
12 months to Mar-15
Foreign Investor
69%
In the year to
March 2015,
69% of office
sales were to
foreign
investors
Savills Research
Private Investor
26%
Undisclosed
5%
Source: Savills Research
savills.com.au/research
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Savills Research | Perth CBD Office
April 2015
Select Perth CBD Office Sales to March 215
Date
Property
Price ($m)
NLA (sq m)
$/sq m
Yield (%)
Apr-14
256 Adelaide Tce
91.00
17,719
5,136
10.72
Nov-14
220 St Georges Terrace
35.00
9,197
3,806
na
Source: Savills Research
na = not available
Of the $133 million worth of transactions reported in the Perth CBD in the 12 months to
March 2015, 69 percent or $91 million were sold to foreign investors. In the 12 months to
December 2013 there were no sales made to foreign investors; on average over the past
five years there have been only 11 percent of total sales made to overseas purchasers. This
further highlights the recent increase in interest in Perth assets from foreign capital.
Market yields have gone through a prolonged period of stagnation. Market yields in the
Perth CBD as at March 2015 are estimated to range between 7.50% and 8.75% for A
Grade buildings, and between 8.75% and 10.25% for secondary grade buildings. The
average yield for A Grade office buildings in the quarter to March 2015 is 8.13%, no change
over the year.
Capital values have generally eased over the past 12 months especially in secondary grade
space predominantly as a function of a fall in effective rents but also a rise in vacancy.
Capital values in the Perth CBD as at March 2015 are estimated to range from $6,600 per
square metre to $10,000 per square metre for A Grade buildings, and between $4,150 per
square metre and $6,000 per square metre for secondary grade buildings. Average capital
values for A Grade properties are $8,300 per square metre, no change over the year.
savills.com.au/research
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Savills Research | Perth CBD Office
April 2015
Key Market Indicators - March 2015
Premium
A Grade
B Grade
Low
High
Low
High
Low
High
Rental – Gross Effective ($/sq m)
640
710
525
675
405
515
Rental – Net Face ($/sq m)
715
800
575
750
395
525
Rental – Net Effective ($/sq m)
518
580
417
544
260
345
Outgoings – Operating ($/sq m)
115
125
95
120
95
110
Outgoings – Statutory ($/sq m)
50
60
50
60
50
60
Outgoings – Total ($/sq m)
165
185
145
180
145
170
Typical Lease Term (years)
7
10
5
7
5
7
Yield – Market (% Net Face Rental)
6.75
7.75
7.50
8.75
8.75
10.25
IRR (%)
8.50
9.00
8.75
9.75
9.50
10.50
Cars Permanent Reserved ($/pcm)
750
800
700
750
550
685
Cars Permanent ($/pcm)
700
765
600
700
500
600
9,200
11,800
6,600
10,000
4,150
6,000
Office Component Capital Values ($/sq m)
Source: Savills Research. NB – All rents equivalent to whole floor mid-rise
Outlook
While leasing conditions in the Perth office market are undoubtedly restrained, continued
strong economic fundamentals such as population growth and low unemployment ensure
that the market is supported. Vacancy rates are at a five-year high, and the substantial
amount of stock additions due in 2015 should result in the vacancy rate increasing further.
As a result of this increasing vacancy, effective rents are expected to remain under
pressure, although to a lesser degree than what was seen over 2014. Incentives may also
increase a little further, while still being below the levels being seen in the eastern states.
The Perth market is closely correlated with the resources sector, which is known for its
rapid changes; all it would take is for one ‘proposed’ resources project to be moved into the
‘committed’ phase to spark a renewed spike in office demand.
Perth’s capital transactions market is anticipated to continue to be popular with both
foreign and domestic investors over the medium term, as comparatively high yields persist
in attracting capital. However actual transaction volumes are severely hindered by the lack
of suitable stock being presented for sale.
savills.com.au/research
10
Savills Research | Perth CBD Office
April 2015
Savills West Australia Team
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+61 (0) 3 8686 8012
[email protected]
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