CAPITAL TRANSACTIONS 

According to Graham Postma, WA Managing Director and National Head of Office Leasing at Savills Australia, 2019 has been a strong year for vendors, with a number of campaigns setting new benchmarks. 

“Investor interest continues to be strong with competition being seen from east coast based fund managers, institutions, and offshore capital, in particular from Singapore,” he said. “The most pleasing aspect in the campaigns we have run has been the depth of bidding which has driven strong outcomes for our vendors.” 

“This year we successfully transacted assets that had gone to market in the past 24 months and not sold. We also introduced purchasers from outside of WA who drove pricing and ensured we achieved a value substantially in excess of our estimated realisation price.”

“We anticipate further yield compression in the coming 12 months, driven by the decreasing cost of capital and forecasted net effective rental growth. Investor demand will continue to be strong, driven by the ongoing yield differential and the positive relative value proposition offered by the Perth market when compared to the east coast capital cities. Perth, when compared on a regional basis, offers compelling returns that are substantially higher than the majority of gateway cities across the Asia Pacific region.” 

RETAIL SERVICES

Chris Ireland, Director of Retail Services at Savills Australia said retail leasing over the past year has been challenging in the sub-regional centre category, in particular on the leasing of vacancies and renewals, given retail sales turnover for specialty stores has been relatively consistent with 2018 figures highlighting minimum growth. Consumer confidence in spending and also the level of incentives being requested by retailers has been slowing deal turnover and progress.

However, neighbourhood centres continued to perform well this year given their convenience fresh food offering and reduced exposure to mainstream retail categories. 

“Supermarket sales and Food & Beverage across both sub-regional and neighbourhood centres also continued to perform well and identify growth,” he said. 

“We forecast little change in the current situation across sub-regional and neighbourhood centres given the current trading climate and consumer confidence levels. Yet we anticipate 2021 will show increased retail sales growth as we start to see flow-on effects of the upside in the resource sector coming through.” 

RETAIL & COMMERCIAL SALES 

“Neighbourhood shopping centres anchored by a Coles or Woolworths supermarket continued to display their resilience as an investment of choice among buyers in 2019,” explained Barney Dear, Associate Director of Commercial & Retail Sales at Savills Australia. “Annual 2.7% growth in supermarket spending in WA, the non-discretionary nature of specialty tenants in neighbourhood centres, coupled with the increasing demand for quality food and beverage offerings all contributed to the success of these centres, fueling buyer engagement.” 

“Favourable lending conditions and the accessible price point of neighbourhoods also ensured their popularity, with yields remaining either side of 6.0% for quality, well-located centres.”

“Looking forward to 2020, we foresee continued demand for these centres. The low cost of borrowing will further encourage syndicators to participate in the sector and we believe yields and transaction volumes will remain steady for the next 12 months.”

INDUSTRIAL & LOGISTICS 

According to Matthew Hopkins, Director of Industrial & Logistics at Savills Australia, the resilience of the Perth industrial market since the downturn five years ago has been impressive. Vacancy levels for modern well-located stock have remained in the 5-15% range and capital prices for this same stock have been largely held up due to yield compression across the asset sector, as well as the tightly held nature of the Perth industrial market. That said, rents have compressed during that same period and secondary stock has been more substantially impacted both in terms of rents and vacancy.

“2019 has continued to be challenging, but for the first time since the downturn, we have seen a positive change in sentiment and a general improvement in levels of lease enquiry,” said Mr Hopkins. “Workshop enquiry in particular has seen a strong resurgence this year and we are expecting that to translate into a strong level of take up for good quality workshop buildings into 2020.” 

“Land prices in particular have rebounded markedly during 2019 with areas such as the Forrestfield/High Wycombe Industrial Area seeing prices back up to the 2013/14 levels. This is in large part being driven by the strengthening owner occupier market, driven by improved business confidence combined with continued falls in interest rates, making the buy versus lease equation swing firmly back to the buy side.” 

Mr Hopkins stated that 2019 could be seen as the year when Perth’s industrial core consolidated. 

“There have been a number of large road infrastructure projects over the last decade with the final pieces of that development programme largely finishing in 2019. These improved road networks have further consolidated the Kewdale/Welshpool and immediately surrounding precincts as the logistics hub for Perth, and that reality is not going to change for the foreseeable future. It is likely that the weight of capital seeking a foothold in the Perth logistics market will be focused heavily in these precincts next year.”

“The first half of 2019 saw a substantial increase in the level of pre-commitment leasing activity, much of which is currently under construction, when compared against the previous couple of years and this will account for a large percentage of the final years take up. Existing building leased activity, lease renewals aside, has been much more lacklustre. This pre-lease activity has slowed towards the second half of the year and is going to result in a large amount of backfill space becoming available mid-to-late 2020. We anticipate a resultant increase in leasing activity in the 5,000sq m plus size range as this back fill space is taken up by those seeking quality buildings in core locations.” 

“As market sentiment improves and business confidence returns on the back of committed mining infrastructure spend, we expect to see an improved level of leasing activity in 2020, with demand for quality heavy duty workshop space being a key driver. Rents and incentive levels have been largely stable for the last 3-4 years through a challenging period in the local market.” 

Mr Hopkins said he anticipates that tenants will see the coming year as a good time to reset and lock in today’s rates on quality buildings as they are freed up due to pre-commitment development. 

“Flat market rents are unlikely to continue indefinitely, and given Perth has already experienced depressed conditions for a five year period, we believe an upturn is more likely over the short-to-medium term than any further downside. As market conditions are still tenant favoured, we believe that tenants should see this coming year as an opportunity to act.” 

“Perth has seen a lack of industrial investment stock traded over the last few years and 2019 was particularly quiet. For this reason, the yield compression that has been seen across the sector nationally has had very few opportunities to be tested in Perth. We anticipate a number of large investments opportunities are likely to test the market and in our opinion reset the pricing structure for the Perth industrial market. The new reality of core logistics market pricing should to come to the fore in 2020 as we anticipate prime yields heading sub 5.5% for the first time in the Perth market.”

“Investors are largely seeking the same targets, being long WALE, good quality, logistics facilities in core locations. Perth’s tightly held industrial market and a general lack of confidence in the fundamentals over the last five years has limited the investment supply. As confidence returns, a couple of key sales should recalibrate the market and drive the value, in turn providing a reason to trade. We therefore anticipate a much improved industrial investment transaction level in the coming year.” 

OFFICE LEASING 

According to Graham Postma, National Head of Office Leasing at Savills Australia, the Perth Office Leasing Market continues on its recovery path. The key trends of 2019, ‘Flight to Quality’ and ‘recentralisation’ back to the CBD, are continuing to provide positive absorption for the CBD.  Buildings such as 240 St Georges Terrace, Kings Square and 140 St Georges Terrace were arguably the biggest beneficiaries of these trends for 2019, either achieving or approaching 100% committed status during 2019.

“The declining vacancy within the prime market is now translating into effective rental growth as landlords look to reduce incentives as occupancy levels within their assets reach for better key market metrics,” said Mr Postma. “Buildings with larger contiguous vacancies are also facing less competition as opportunities diminish, which should provide for the opportunity to improve terms over the course of 2020.”

“Strong competition remains within the B Grade sector, particularly in the smaller ‘spec suite’ space, which is also feeling the effects of increasing competition from the co-working expansion.”

“The coworking sector has had a strong impact in 2019 with both expansion of existing players and significant new entrants opening in Perth. WeWork’s commitment to over 11,000sq m at Central Park and William Square, and Spaces to a further 3,000sq m in The Wentworth Building were the most notable.” 

“There has been significant speculation during recent months around the potential for growth in the education sector within the CBD.  Murdoch University is now exploring this option for a significant 15,000sq m requirement, which may well lead to further activity in the sector going forward.”

“Likewise, we saw a number of smaller resources-based project requirements enter the market during the year, but encouragingly, these all appear to be increasing in size as confidence grows and projects are awarded. This confidence will likely grow in 2020.”

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For more articles exploring the trends, highlights and outlook of the 2019/2020 property markets, click here.