Property sector bullish, despite vacancy rises

National office vacancies have breached the double-digit barrier to hit 11.3 per cent - levels not seen for more than 14 years.

National office vacancies have breached the double-digit barrier to hit 11.3 per cent - levels not seen for more than 14 years.

But despite the underlying weak leasing market, demand remains high for premium office towers, which provide solid capital growth for landlords.

In investment markets, Jones Lang LaSalle has recorded $2.4 billion of office transactions (above $5 million) over the September quarter and $11 billion over the past 12 months.

Jones Lang LaSalle's head of capital market research, Andrew Ballantyne, said the high level of transaction volumes illustrated the strong demand for core real estate. "The most active buyers are domestic wholesale funds and offshore investors," he said.

Boosted by the investment deals, sentiment in the real estate market is riding high, with the Property Council/ANZ Property Industry Confidence Survey showing the NSW confidence index sitting at 142 for the December quarter (where 100 is considered neutral).

The head of property research at ANZ, Paul Braddick, said the survey provided an optimistic view of the property market.

"NSW and Victoria [were] the only states to report positive capital growth expectations," he said.

Morningstar property analyst Tony Sherlock said the property sector was in a state of flux, with economic drivers providing mixed messages.

"Headwinds arise from the soft economy, tailwinds arise from low interest rates, and crosswinds arise from currency volatility and an increased risk of asset bubbles and inflation," he said.

But while business is confident, leasing vacancy levels are rising, according to Jones Lang LaSalle research for the third quarter. Jones Lang LaSalle's head of office leasing, Tim O'Connor, said five of the six CBD office markets had recorded double-digit vacancy rates.

Brisbane (14.5 per cent), Adelaide (13.1 per cent), Sydney (10.7 per cent) and Melbourne (10.5 per cent) increased over the quarter, while Canberra recorded a moderate reduction in vacancies to 11.4 per cent.

Despite the rises in vacancy rates, Mr O'Connor said evidence was emerging that business confidence had rebounded since the federal election. "Stronger business confidence has stymied the rise in sublease availability," he said.