How Investors Can Profit From The Weak Brisbane Office Market

With rents plummeting by 35 per cent in two years and further supply set to enter the market, Brisbane’s office market has been anything but a landlord’s paradise but according to CBRE the market may be almost at its bottom.

CBRE Head of Research Stephen McNabb said rents that have been depressed by the end of the mining boom are likely to hit a trough just a little below their current level.

“There might be another five per cent downside on our forecasts but you could say the worst has passed because the market has priced that in,” Mr McNabb said.

“That's as positive as you can be at the moment. The supply and demand situation is obviously well flagged so the market has priced a lot of that in already.”

After that, CBRE sees rents even starting to rise again within a few years.

“Beyond 2017, we see rents rising to an extent in Brisbane - not to the same extent as Sydney but that will provide a bit of underlying support and hence an offset to potential higher interest rates.”

“If you're a tenant you'd be looking at locking in.”

Source CBRE[/caption]McNabb says that the biggest threat to capital values in Brisbane and around Australia is a change in the global economic situation which could lead to higher interest rates and yield expansion in office property.

“The risk is if macro factors change. If interest rates increase and return expectations increase you do need to have growth in rents to compensate for that,” Mr McNabb said.

“That would be the risk in the short term. For a market like Brisbane where you do still have pressure on rents you have the prospect at a macro level for interest rates to move which may precede the growth in rents.”

CBRE Associate Director Capital Markets Peter Walsh said transaction values were much lower than last year, falling from more than $12 billion in 2014 to $4 billion in 2015 year to date, from more than $8 billion in 2014 to about $2 billion in Melbourne, and in Brisbane from nearly $5 billion in 2014 to about $2 billion this year to date.

Mr Walsh said that about 16 per cent of Brisbane acquisitions were funded by foreign capital between 2005-2009, doubling to 32 per cent in 2010-2015 for a total of $9.8 billion.

Key factors driving foreign investment in the market included the fact that the cost of debt was at record lows and the Australian dollar being weaker against all major currencies.

Mr Walsh said that the near city vacancy rate remained high and well leased assets were tightly held.

Well leased assets were outperforming, with assets with a Weighted Average Lease Expiry (WALE) of 2.2 years selling for an average yield of more than 8.75 per cent, while assets with a WALE of 7.5 years sold for 7 per cent.

Source CBRE[/caption]“There are opportunities in the secondary market which will allow you to acquire on attractive property fundamentals and look to reposition.”

“These require a significant amount of equity with challenges surrounding debt and letting up cost.”

“Ability to be flexible in your leasing approach is critical.”