It will be Brisbane where we may see the best prospects for value uplift in prime grade office markets over the next couple of years, according to property analysts Urbis.
Occupier metrics have troughed, resulting in an environment where discerning capital will increasingly look to enter the market on the back of a relative value play compared to Sydney and Melbourne.
Urbis Real Estate Advisory Director Fraser Bentley presented the Office Market Report figures in Brisbane last week on behalf of the Property Council of Australia, and said that the total Brisbane vacancy rate fell for the first time in years from 16.9 per cent to 15.3 per cent.
He said it is expected to fall considerably further over the coming two years.
“Queens Wharf continues to be a catalyst for change in the CBD. The stock withdrawals for Queens Wharf contributed, but it was the net absorption of 50,000sqm for the half and approximately 95,000sqm for the year that also had a big impact,” Mr Fraser said.
“The full-year figure was a record high that really took us by pleasant surprise – it’s a shot in the arm for the confidence of the local market.”
Brisbane set to show sustained improvement
The Brisbane CBD office market has shown sustained improvement, with CBD leasing activity stronger than expected over past six months – this is now a continuing trend, having occurred in back-to-back biannual surveys.
Queensland public sector demand for office space been positive. Business conditions are set to improve over the coming years, after an extended period of weakness.
Mr Fraser said the decline in effective rentals is now expected to have been arrested and a period of stability is likely to occur into 2017 before a return to growth for 2018 as incentives contract.
North Sydney to benefit from falling CBD rates
Meanwhile, the Sydney occupier market has experienced an extraordinary year with stock withdrawals coupled with demand, leading to strong effective rentals being experienced across all sectors, particularly B Grade stock.
Sydney CBD vacancies edged up over the last six months from 5.6 per cent to 6.2 per cent, which is partly related to the reduced tenant footprint associated with big tenants moves such as PwC and HSBC to Barangaroo.
Mr Fraser said that Sydney CBD vacancy rates should fall to below five per cent over the next two years.
“Accordingly, I can see the suburban markets, especially North Sydney benefitting. All eyes will be on the movements of NBN, Coca Cola Amatil, Flight Centre, Mastercard and Veda,” he said.
Melbourne finds balance in supply and demand
In comparison, Melbourne occupier markets also experienced a solid year, with balance found between demand and supply. Moderate effective rental growth was recorded.
Melbourne CBD vacancies tightened up further over the last six months, from 7.0 per cent to 6.4 per cent. Strong net absorption of 117,000sqm for the full year was recorded – the best in the nation.
A tale of three cities
Fraser said the capital markets have done a great deal of the ‘heavy lifting’, with yields having markedly dropped for prime – 200 basis points over the last two years.
"Despite bonds jumping in late 2016, the bonds and interest rate outlook has moderated, and therefore we expect to see the “lower for longer” theme continuing for some time yet."Offshore capital continues to look to the Australian markets for opportunities and this is expected to continue. Competition between domestic and offshore capital investors is expected to remain a continuing theme.
“Sydney and Melbourne prime yields are now below five per cent. Whilst the yield cycle is now maturing, we are likely to see some yield tightening in selective asset classes or markets with superior income appreciation prospects," he said.
“Therefore, it is Brisbane that could well see the relative value play come to the fore, where yields presently remain some 150 to 200 basis points above that of Sydney and Melbourne."