RESEARCH

Refurbished floors returned to the market for lease and delayed commencements for incoming tenants meant the CBD office vacancy rate only reduced Commodity price growth 10 bps to 18.4% in the 6 months to July 2019. moderating, but still sitting at healthy levels Commodity Prices & Occupied Space However 6 months net LHS: Indexed to Jul-99, RHS: ‘0,000sqm absorption of 15,923 square The sustained run of steep price metres indicates demand for improvement in WA’s major commodities space is continuing. appears to be slowing, with short-term 500 1,600 iron ore supply shortages in Brazil 450 1,500 High quality Premium and upper resolving quicker than first expected, and 400 350 A-grade space has attracted the collapse in LNG spot prices putting 1,400 most of this demand, allowing pressure on export contracts in place 300 prime effective rents to grow (where prices are typically determined 250 1,300 9.5% over the past 12 months. 200 based on the price of oil.) 1,200 150 100 Prices falling back to more sustainable 1,100 No new supply is confirmed until 50 levels are unlikely to be the catalyst for 2023 when Chevron will occupy 0 1,000

a new 30 storey tower at any economic or property market

Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-18 Jul-19 Jul-05 Jul-11 Jul-17 to be constructed regression, as the more recent rapid Jul-99 by Brookfield. Other mooted increases were viewed as temporary, and Non-rural commodity prices – A$ Perth CBD Occupied Space proposals will likely have a not the sole basis behind the expanding similar horizon should they pipeline of major projects. secure pre-commitment. The short-term boost is still providing Yields have firmed 19 bps YoY, welcome benefits, with above-forecast behind office occupancy levels having and the calendar year could royalty revenue being a major contributor historically moved in step with record the highest transaction to the State budget returning to fiscal commodity prices (see Figure 1). The volume since 2013. surplus in 2018-2019 for the first time in 5 main misalignment occurred due to years and improving the State’s credit periods of <1% vacancy and the inability rating. to bring supply to the market in time.

Increased revenue is also allowing the A further indicator to future economic Government to begin chipping away at prospects is the continued growth in approximately $36 billion of net debt, and mineral exploration dollars spent. fund the first round of investment into major new metropolitan rail projects. The June 2019 quarterly recording of $413.1 million reflects the highest level This relationship between commodity value since March 2013, continuing prices and private and public sector unabated growth since the trough of Senior Analyst — Research WA investment drives employment in March 2015 ($183.2 million, +125%) and professional services, and is the rationale highlighting confidence within the sector.

Perth CBD Office Market Indicators as at July 2019

Total Stock Vacancy Rate Annual Net Average Net Face Average Average Core Grade (m²) (%) Absorption (m²) Rent ($/m²) Incentive (%) Market Yield (%)

Prime 1,118,177 14.8 14,279 550—650 40—45 6.25—7.00 Secondary 657,658 24.4 8,396 370—450 45—55 7.00—7.75 Total 1,775,836 18.4 22,675

2 PERTH CBD OFFICE SEPTEMBER 2019 RESEARCH

Net Absorption & Outlook CBD occupancy creeping closer to peak levels

14,279 sqm YoY Prime 10,484 sqm 6 mo The latest PCA recording marks 2½ years of positive absorption into the Perth CBD

8,396 sqm YoY office market (see Figure 2), and 84,766 Secondary 5,439 sqm 6 mo square metres more occupied NLA compared with the trough of July 2015. Source: Knight Frank Research/PCA

The ‘flight-to-quality’ is Today’s 1,450,000 sqm of occupied complete, and shaping the space sits higher than January 2012, but market as a result lower than July 2012 when approximately 157,000 sqm of mostly pre-committed Movement of tenants into prime space stock was added to the market, from secondary buildings and non-CBD instigating the beginning of negative locations has slowed as the range of absorption as occupiers consolidated available options diminish, and those accommodation and requirements able to capitalise on softer market lessened. conditions have locked in long terms. The significance of approaching this This demand—thus far to the detriment of This has had a two-fold impact on tenant milestone is that the positive net suburban and fringe markets—will lose demand: absorption has occurred without the momentum as higher quality CBD same volume of project-specific office offerings push back on asking rents and • larger top tier occupiers in the space (essentially short-term demand). incentives, and remaining price- market are forced to explore the competitive offerings present as less possibility of pre-committing to a An element of uncertainty compelling reasons to relocate. new building; and still remains • leasing activity has shifted towards Increased white collar employment will be smaller tenants, to the benefit of well Whilst the economy appears to have required in order to sustain positive net -located and refurbished secondary turned the corner and commodity prices absorption, and this will only occur with buildings. are contributing to resource-sector led improvements to the broader economy. demand, the primary reason for net This trend is represented in Figure 4, absorption over the past two years has As always, the most likely driver to where the contribution of sub-1,500 sqm been tenants returning to the city that economic improvement? Resource enquiries has been trending upwards on were previously priced out during the sector-led private investment. a quarterly basis. peak of the boom.

Perth CBD Occupied Floorspace Perth CBD Net Absorption Perth CBD Tenant Rep Enquiry ‘0,000 sqm sqm net absorption per 6 month period by grade sqm, sum of requests per quarter, CBD only

1,600 140 60,000 60,000

120 45,000 1,500 100 50,000 Thousands 30,000 80 1,400 15,000 40,000 60

1,300 40 0 30,000

20 -15,000 1,200 0 20,000 -30,000 -20 1,100 -45,000 10,000 -40

1,000 -60 -60,000

0

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jan-10 Jan-11 Jan-12 Jan-13 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-14

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Jul-18 Jul-19

Apr-18 Oct-18 Apr-19 Oct-17 Jan-19 RHS: Net Absorption (6 months) Jan-18 PREMIUM A B C D LHS: Occupied Space 0-499 500-999 1000-1499 1500+

3

The three buildings anticipated to be Vacancy Rate & Outlook A-grade expiries will test the depth of the market available will provide large tranches of space to the market following a period 14.8% Prime GDI Property Group’s announcement of whereby contiguous areas have been +160bps YoY having re-secured WA Police at Westralia letting up well (Figure 6).

24.4% Square for an additional 5 year term has Secondary -450bps YoY removed a major source of uncertainty in Each building also provides a slightly the market, with several other known different style of accommodation that will suitors in the market now set to formally be demarcated by asking rents. Today’s vacancy rates don’t commence leasing campaigns. paint the full picture New development proposals The varied agreements with the State fighting for the same tenants A divergence between space currently Government to retain the Police, secure deemed vacant (unoccupied) by the the Department of Births, Deaths, and The battle for pre-commitments has Property Council versus space actually Marriages, and lose the Department of intensified, with a major tenant that could available for lease (advertised today) has Justice results in a net reduction in underpin the development of a new tower widened over the past 18 months, and in leased space of 11,142 square metres (in currently considering proposals, in particular the past 6 months. addition to other lease expiries). With addition to the outstanding decision from little like-for-like ‘upper’ A-grade WA Police to consolidate sections of their Strong letting up activity has occurred accommodation available by way of workforce into a new building. across numerous buildings that is still yet competition, the building appears to be incorporated within Property strongly positioned to attract tenants. According to the AFR, ConocoPhillips Council figures, providing a distorted have reportedly committed to a new A- view of the market at the present time. Other buildings vying for the WA Police grade building to be constructed at are thought to have included 905 Hay Capital Square, however confirmation Knight Frank’s analysis of the market has Street (leased to Chevron until April may hinge on a potential sale of its north- found that 15.4% of the core CBD (as far 2020), and 168-170 west gas interests. east as Victoria Avenue) is currently (leased to the State Government until advertised for lease (see Figure 5, and early-mid 2020). Development proposals prepared for refer to the rear page of this report). both of the above, FMG (delayed—no The former provides modern decision made), ABN Group (committed Comparatively, fringe areas are accommodation at the west end of the to the suburbs), and other confidential struggling, with advertised vacancy in the CBD, whilst the latter will likely require requirements have flushed out a range of ‘East End’ (Victoria Avenue to Hill Street) larger scale refurbishment, but provides development sites, indicating where the elevated at 31%, and Northbridge & functional large floorplates in a central CBD’s future supply is likely to come Stirling Precincts at 17%. CBD position. from.

Perth CBD Vacancy By Precinct Perth CBD Vacancy By Grade (PCA) Contiguous Spaces Advertised % of market advertised % by grade # by PCA grade over 3,000 sqm (inc sublease)

35% 35% 8

30% 30% 7

25% 6 25% 20% 5 20% 15% 4 15% 10% 3 10% 5% 2 0% 5%

1

East West

North 0%

Central

CityLink East End East

CBD Core CBD 0

CBD Fringe CBD Premium A-grade B-grade C-grade

Jul-10 Jul-11 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-09 Jul-12

PREMIUM A B January 2019 July 2019 Northbridge/Stirling

4 PERTH CBD OFFICE SEPTEMBER 2019 RESEARCH

1

6

3

4

5 2

105 Lord Street— 6,930m² 1 Confirmed / Under construction / Site NextDC works Under Construction Completion H1 2020 DA submitted / DA approved (past 24 months) 2 Lot 7 & 8 EQ—52,785m² [Chevron] Chevron/Brookfield # DA Approved Development sites (Mooted / Known to Completion 2023 be actively seeking pre-commitment / Expired DA) 674-692 Hay Street Mall— 20,000m² 3 Dexus DA Approved Seeking pre-commitment (office/education) 1 & 21 —18,197m² 4 Brookfield DA Approved Seeking pre-commitment

5 Lots 5 & 6 EQ—15,000 & 35,000m² Brookfield In-principle planning approval# Seeking pre-commitment Cnr Milligan St & Murray St—10,000m² Office NLA component quoted (approx.) 6 Fragrance Group DA Approved Major Pre-commit in [brackets] next to the NLA Seeking pre-commitment # denotes planning under the auspices of the Metropolitan Redevelopment Authority

5

Rents, Incentives & Outlook Face rental growth on the horizon for prime buildings

$596/sqm face Prime +1.0% YoY Prime net face rents remain generally Rents (n) $328/sqm eff static at an average of $596/sqm; a level +9.5% YoY that has increased slightly (+1% YoY), but only for buildings reduced to nominal $388/sqm face vacancy. Secondary +1.0% YoY Rents (n) $187/sqm eff Effective rental growth transitioning into +2.7% YoY face growth will likely occur as incentives P: 45.0% decline to a level in line with the cost of a Incentives S: 51.8% fit-out; typically around 30-35% (net) depending on the level of specification Effective rents climbing as and the length of lease term. At this incentives drop stage—with no residual incentive to claim as abatement—we speculate upwards Deal evidence observed during late pressure on face rents will increase. Prime Face Rent & Incentive 2018 / early 2019 indicated incremental LHS: $/m² p.a average face net improvements to incentives were taking Six months ago, the prospect of RHS: % incentive place, generally in line with the fairly incentives declining to these levels (30- modest declines to overall vacancy. 35%) within the short term appeared $900 60% distant, however should recent $800 The improvements have continued —and momentum be maintained, we anticipate 50% $700 escalated—to the extent that A-grade these levels will be reached in 2020. buildings previously offering generous $600 40% deals at well over 50% are now securing Knight Frank’s forecasting model projects $500 30% tenants at levels closer to 40%. prime net effective rental growth of 36% $400

to the end of 2023 on top of the 9.5% $300 20%

The principle reason for the more sudden growth achieved over the past 12 $200 decline can be attributed to particularly months. 10% $100 aggressive landlords having mostly $0 0%

leased their buildings, removing a key Of note, these projections are based on

2003 2004 2005 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008

2019 f 2019 f 2020 f 2021 2023 f 2023 element of competitive tension which has economic forecasts that will change f 2022 arguably kept incentives significantly rapidly should major resource-sector Net Face Rent Incentive elevated for longer than necessary. projects receive final confirmation.

Perth CBD Face Rents $/sqm p.a average prime v secondary Recent Leasing Activity Perth CBD

Term New / $900 Address NLA m² Tenant yrs Renewal $800

$700 256 St Georges Terrace 14,699 Various Chevron R*

$600 240 St Georges Terrace 10,706 10 Worley N $500 95 William Street 6,784 7 Rio Tinto R* $400

$300 556 Wellington Street 5,232 10 St John of God N

$200 45 Francis Street 3,414 15 WeWork N $100 55 St Georges Terrace 3,222 10 Minister for Works N $0

32 St Georges Terrace 3,077 10 Minister for Works N

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Jan-10 Jan-09 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

PRIME SECONDARY 15-17 William Street 1,867 ND McDermott International N

6 PERTH CBD OFFICE SEPTEMBER 2019 RESEARCH

Varying investment traits will Current Yields & Outlook provide a strong snapshot

6.43% - 6.88% of the market Prime Perth CBD Office Transaction Volume -19bps YoY $ millions, transactions $10 million+ Based on confirmed transactions, Perth (inc. Stirling Prec.), East Perth, Northbridge

7.39% - 7.77% properties understood to be under Secondary -15bps YoY contract, and those currently marketed, $1,600 12

Knight Frank anticipates approximately $1,400 10 $1.15 billion of CBD office sales could Prime yields sharpening $1,200 occur during 2019; a figure that would be 8 with rental growth prospects $1,000 the strongest annual result since 2013. $800 6 Perth’s elevated prime yield spread to $600 Whilst this outcome is underpinned by a Sydney has seen some narrowing over 4 50% stake in the new Chevron building the past 6 months (Figure 11), coinciding $400 2 to be constructed at Elizabeth Quay with a reduction in Perth’s face/effective $200

(thought to be under contract to Invesco rent dichotomy. $0 0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2019 for approximately $400 million), another 2018 three $100+ million buildings are As incentives erode further, returns will Currently Marketed (approx.) Under Contract / Heavily Rumoured (approx.) understood to be under contract, improve, and eventual face rental growth Confirmed Transactions Number of Transactions including the recently announced sale of will drive capital appreciation. Potential Transactions William Square to Centuria for $189.5 million. These improving growth prospects—

along with cheaper borrowing costs— The Chevron building, William Square should ensure that the tightening has not and HBF House (developed within the finished, or at very least will prevent a Prime Office Yield Spreads Kings Square precinct between the CBD softening in comparison to other late- bps & Northbridge) have each been marketed cycle domestic markets. based on their modern accommodation, 600 strong tenant covenants, and long WALE, Value-add purchases and will each command tight yields. looking strong in hindsight 500 +100bps

10yr avg 66 St Georges Terrace (confirmed For sales transactions greater than $10 400 million to have occurred across 2017 and transaction), 28 , 2 Mill 300 Street, and 263 2018, buildings were on average 32% +40 bps (including 2 Victoria Avenue) are all vacant as at the date of transaction. 200 10yr avg considered core plus / value add propositions sitting within the secondary As at 1 September, the same group are 100 16% vacant, with further areas leasing market, however their letting up 0

prospects are amongst the brightest understood to be at heads of agreement.

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 within the category that are poised to With greater occupancy and yields Jan-19 benefit as the prime end of the market tightening further, the value of counter- Spread to Sydney Spread to 10Y Bond Yield continues to fill up. cyclical investing is already evident.

Recent Sales Activity Perth CBD

Price $ Core Mkt NLA $/m² WALE Sale Address Grade Vendor Purchaser mil Yield % m² NLA yrs Date 45 Francis Street# - 189.5 6.4 21,765 8,706 7.7 Warrington/Goldman Centuria Sep 19 180 Hay Street# A 12.6 - 4,925 2,558 VP Owner Occupier GDI Jul-19 179 St Georges Terrace C 18.3 - 4,164 4,383 - Private Syndicate Warrington C.P. Feb 19 66 St Georges Terrace B 72.0 7.1 11,407 6,312 1.9 Oxford CorVal Feb 19 34-50 Stirling Street - 24.0 7.3 6,447 3,723 2.2^ Owner Occupier Elanor Investors Dec 18 226 Adelaide Terrace A 86.0^ 7.0 14,391 5,976 2.4 Blackstone Primewest Dec 18

7

Advertised Vacancy Areas Covered:

RESEARCH Nicholas Locke Senior Analyst—WA +61 8 9225 2429 [email protected]

Ben Burston Partner, Chief Economist +61 2 9036 6756 [email protected]

CAPITAL MARKETS Todd Schaffer Partner, Head of Division— WA +61 8 9225 2405 [email protected]

OFFICE LEASING Ian Edwards Partner, Head of Division—WA +61 8 9225 2420 CBD Core—Central CBD Fringe—East End, Stirling, Northbridge [email protected]

CBD Core—West Greg McAlpine CBD Core—North Partner, Head of Division – WA +61 8 9225 2426 CBD Core—CityLink [email protected]

CBD Core—East OCCUPIER SERVICES Mitch Allen Method: Advertised vacancy analysis summarised herein is produced on the basis of online Director, Occupier Services listings being up to date as at the time of collection. Best endeavours are made to verify the +61 8 9225 2450 accuracy of this information, however any findings presented within this report should be [email protected] treated as a guide only. We do not attempt to forecast impending vacancy prior to the ASSET MANAGEMENT SERVICES space being advertised for lease. Kellie von Bergheim Partner, Head of Division — WA July 2019 analysis incorporates 1,623 floors across 128 buildings greater than 2,500 square +61 8 9225 2457 [email protected] metres.

Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.

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