Landlords face flat period in office rents

Office landlords are not expecting any rise in rents for at least another 12 months as market conditions soften and tenants demand higher incentives to make a lease more attractive, according to company chief executives.

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.