This article is from the Australian Property Journal archive
A LACK of investment grade properties in Sydney and Melbourne has driven investors to look at the Brisbane office market. However BIS Shrapnel said it is the wrong time to invest in Brisbane because the worse has yet to come.
BIS Shrapnel’s senior project manager Christian Schilling said domestic and offshore investors who have adopted a counter-cyclical investment strategy believe it is the right time to buy.
However Schilling said there is further downside risks with the CBD vacancy rate to peak at around 20% late 2016/early 2017,
“With both domestic and overseas investors struggling to find stock in Sydney and Melbourne, many have turned their attention to the Brisbane office market.
“Brisbane’s attraction is the higher initial yields on offer relative to the increasingly expensive larger cities. Some investors feel confident also that with long term leases locked in they will ‘ride through’ the downturn safely,”
“We are now seeing that a counter-cyclical logic has joined the reasoning.
“Investors are anticipating the imminent peak in CBD vacancies – as the last of the three major new towers is completed in late 2016 – believing that it will be followed by a rapid rebound in effective rents and prices,” he added.
“Their logic is: prime gross effective rents have already fallen by nearly 50% from their 2008 peak. The market is close to the trough. They think it’s the right time to buy.
“BIS Shrapnel’s latest analysis of the Brisbane office market suggests effective rents and prices in Brisbane have further to fall. More critically, it indicates the recovery will be slow, not quick,” Schilling warned
According to Schilling, it will take another two years to reach the trough in effective rents and BIS Shrapnel forecasts suggest that it will take up to six years before capital values return to current levels.
“That means Brisbane office returns over a five-year horizon will be poor, especially if there are lease expiries during that term. We think there will be much better investment opportunities available in other city markets,” he predicted.
Schilling said while the Sydney and Melbourne markets are tightening, Brisbane is suffering from both weak demand and over-building.
“Worse still, 190,000 sqm of new space are being launched into an already heavily over-supplied market this year. Leasing incentives are still rising and effective rents are still falling. The CBD vacancy rate is about to blow out to around 20%.
“Tenants relocating to the new buildings are contracting, with the state government expected to release tens of thousands of sqm of space after 1 William St comes on line,”
“Moreover, office employment remains weak in the wake of the bust in resources investment. We expect to see further job cuts at mining companies and their contractors in Brisbane as the giant Gladstone gas projects are completed,” he continued.
Schilling said whilst some commentators believe office stock withdrawals will save the market, he believes that would not be nearly enough to offset the new supply additions and weak demand.
“All it will do is restrict the blowout in the CBD’s vacancy rate: without the withdrawals, the rate would hit 23%.
“The other positive is those tenants moving back to the CBD from the fringe, after being forced to leave during last decade’s mining boom. These moves are positive for the CBD only – they are not a game changer – and have been built into BIS Shrapnel’s forecasts,” he predicted.
Furthermore, there are two major risks to the recovery – bond rates and construction – both are on the downside.
“Bond rates are unsustainably low and will rise eventually. Whilst the exact timing is uncertain, we expect a sharp rise late this decade/early next decade. When it does come, it will have a flow-on effect on yields and negative impact on capital values. The risk is that it will further delay the recovery in capital values at a time when the leasing market is finally strengthening.
“Construction remains financially feasible: investors are queuing up for new buildings with long WALEs. All the developer has to do is find or ‘buy’ a tenant. A pre-commitment from a large tenant such as Origin would be enough to underwrite a new project in the CBD such as 300 George St.
“The impact of this on the market would be significant: releasing another major office tower into the already highly over-supplied market would delay the next upswing by another year or two given the likely weakness in leasing demand.
“So, is this the right time to invest? No. In time, Brisbane will become a classic counter-cyclical investment proposition. But that is still several years away,” Schilling concluded.
Australian Property Journal
