Landlords face flat period in office rents
Speaking on a panel at the Property Council of Australia's 2013 property congress, the heads of GPT Group, Grocon, Macquarie Bank, Brookfield Multiplex and DEXUS Property, who control more than $50 billion combined of the country's office assets, painted a flat short-term picture for the sector.
They all said more stability was expected in the property and sharemarkets post the outcome of the federal election on September 7, which the panellists tipped would be won by the Coalition.
GPT's chief executive, Michael Cameron, said while gross rents were rising, there were "significant headwinds" in the short-term for the office sector. "There seems to be a disconnect between reality and what's happening in the market for demand, so I think there will be moderate, if any, rises in office rents in the short-term," he said.
Mr Cameron expects solid growth in logistics and industrial businesses until office and retail markets improve, in the medium term.
Grocon deputy CEO Carolyn Viney also said she did not see any "real rent growth" in the short term, but added that quality and new properties would always be in demand in any market conditions.
A new report by Colliers International shows the national CBD office vacancy rate at 10.1 per cent, which is broadly in line with the long-term average.
"The demand slowdown has had a marked effect on leasing fundamentals, particularly the softening of effective rents," the report said. "All CBD markets, precincts and grades experienced a sharp rise in incentives over the first half of 2013, as competition to fill vacant space increased."
The report has found that the combination of stable face rents and rising incentives has caused effective rents to fall by 5.1 per cent nationally in the first half of 2013.
"The forecast is a little brighter over the next 12 months with the expectation that landlords have 'bitten the bullet' early and increased incentives based on vacancy forecasts, rather than the 'point in time' vacancy."
In Melbourne, the vacancy rate rose to 9.8 per cent from 7 per cent six months ago, with the "relatively large" jump in vacancies driven primarily by an increase in backfill space as major tenants moved to newly completed buildings.
Sizeable incentives continue to be an important factor in attracting tenant demand.
"The incentives being offered ... as well as the availability of good quality, contiguous floors, are encouraging tenants to review their space requirements and take advantage of some exceptional deals that are on offer," Colliers found.
Frequently Asked Questions about this Article…
According to chief executives from major property groups, office landlords are not expecting a rise in rents for at least another 12 months. Market conditions have softened and tenants are demanding higher incentives, so the short-term outlook for office rents is broadly flat.
Colliers International found that stable face rents combined with rising incentives caused effective rents to fall by 5.1% nationally in the first half of 2013. For investors, this means headline rents may look steady while net rental income (after incentives) can be weaker, so watch incentive levels when modelling returns.
The Colliers report showed the national CBD office vacancy rate at 10.1%, roughly in line with the long-term average. In Melbourne specifically, vacancy rose to 9.8% from 7% six months earlier, driven largely by backfill space as tenants moved into newly completed buildings.
Sizeable incentives and the availability of good-quality, contiguous floors are encouraging tenants to review their space requirements and take advantage of attractive deals. Increased incentives have been a key factor in boosting leasing activity despite weaker demand.
GPT Group’s chief executive Michael Cameron expects solid growth in logistics and industrial property sectors until office and retail markets show improvement, making these sectors attractive for investors seeking alternatives to CBD offices.
Yes. Grocon deputy CEO Carolyn Viney noted that while there’s little real rent growth expected short-term, quality and new properties remain in demand in any market conditions, which can support leasing and longer-term value for investors.
Panelists at the Property Council of Australia’s 2013 congress suggested post-election conditions could bring more stability to property and sharemarkets. The executives speaking on the panel expected greater market stability after the federal election outcome.
Colliers said the forecast is somewhat brighter over the next 12 months because landlords have increased incentives based on vacancy forecasts rather than point-in-time vacancy. That suggests landlords are proactively pricing incentives to attract tenants, which could help stabilise leasing fundamentals.
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