Pressure on landlords as vacancies rise

The national office market is heading for the toughest period for at least 14 years. Vacancies will rise in coming months, forcing landlords to offer more incentives in leases to entice tenants, say real estate investment trust analysts.

The national office market is heading for the toughest period for at least 14 years. Vacancies will rise in coming months, forcing landlords to offer more incentives in leases to entice tenants, say real estate investment trust analysts.

The warning comes on the eve of the 2013 full-year reporting season, where the office REITs managers are expecting a grilling on lease and occupancy expectations for the coming year.

The big trusts have spent the past two years selling overseas assets to become pure Australian-only office landlords.

The Property Council of Australia will release its bi-annual office market report in two weeks, but already new data has showed that Sydney and Melbourne's city vacancy rate is more than double digits.

According to a recent report by Jones Lang LaSalle's head of capital market research, Andrew Ballantyne, Sydney's vacancy rate was 10.2 per cent and Melbourne's 10 per cent, the first time the two cities moved above 10 per cent in the current cycle.

"Corporate Australia is adjusting to a lower growth outlook over the short term and rationalising their cost base in order to protect and maintain margins. As a result, sub-lease availability has increased," he said.

The REIT analyst at CLSA Asia Pacific, John Kim, said sentiment on the office market had hit rock bottom due to rising vacancy rates and incentives. But these figures have less impact for REITs, as direct vacancy and renewal incentives are significantly lower.

He said DEXUS Property, which owns half of Australia Square with the GPT Group, was one REIT that had the balance sheet to survive, adding it had the firepower to acquire the Commonwealth Property Office Fund (CPA).

There has been market speculation regarding the Commonwealth Bank's Colonial First State potentially selling its property holdings.

"Incentives are rising faster than rents, and this puts into question net effective rental growth potential," Mr Kim said.Average CBD incentives in Australia were 21.5 per cent, 330 basis points above the 20-year average. "Sydney CBD has the highest office incentives among capital cities, with 29.9 per cent incentives," Mr Kim said.

Higher vacancy rates were expected in the four main CBD markets over previous forecasts made in the first quarter of 2013.

"CBRE agents are now predicting significantly higher vacancy increases in mining-driven markets Brisbane (to 12.7 per cent versus the prior forecast of 9.4 per cent) and Perth (to 7.5 per cent versus the prior forecast of 6.3 per cent)," Mr Kim said.

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