Changing demand trends weigh on office sector
Demand for office assets continues to be lower than pre-COVID times, according to an expert.
Ray White Commercial Head of Research Vanessa Rader said prior to COVID, office assets were considered a premium commercial investment choice, with high demand from offshore buyers in major CBDs testament to the attractiveness of the asset class.
“Historically, office asset returns had outstripped those of the other major asset types, however, we saw a change in these results in mid-2021 where ‘all property’ returns eclipsed those of office and office continues to maintain a discount to this rate,” Ms Rader said.
“Currently ‘all property’ returns sit at 5.3 per cent, propped up by a 4.8 per cent income return, while office assets see total returns of just 3.3 per cent, due to the decline in capital returns at 1.2 per cent, while income remains elevated at 4.5 per cent. “The positive ‘all property’ returns are aided by both industrial and retail, which have returns in excess of office results, industrial most notably up 10.4 per cent in total returns, despite being the lowest rate recorded for the industrial market since September 2017.”
Ms Rader said commercial investors have been focused on other asset classes including industrial and retail. “There may be some pause in major office transactions with purchasers more considered of their expected returns and movements in capital values, however, the trophy nature of our CBDs, in particular Sydney and Melbourne, will still draw investment, particularly given the limited nature of larger institutional-grade industrial assets and the caution also surrounding future for retail,” she said.
According to Ms Rader, demand for CBD offices is starting to come back after most of the attention turned to non-CBD locations. “Taking a look back on the last three years, we have seen the growing attractiveness of non-CBD locations overtaking CBDs across Australia given their superior investment returns,” she said.
“Since the onset of COVID-19, returns did reduce, however, with lockdowns restricting staff from attending the office, we saw return levels reduce more prominently in CBD locations. Low interest rates and an appetite to invest in commercial property drove investment into office assets, however, returns for non-CBD offices outstripped those of CBDs due to substantial capital appreciation.”
Ms Rader said investment yields dropped to new lows with non-CBD locations having greater room to move and offer more affordability compared to CBD assets, resulting in a narrowing of average yields. She said, “High inflationary pressures have seen income returns continue at a high rate, regardless of location, keeping total return levels positive despite interest rate increases over the last 12 months.”
Ms Rader said over the past six months, returns for CBDs have been greater than those of non-CBDs. She said total returns for March 2023 were recorded at 3.3 per cent and 3.2 per cent respectively, however, looking over the longer term, non-CBD results have come out on top over various time periods.
“The five-year average highlights CBD annual total returns at 8 per cent compared to non-CBD at 9.8 per cent, and even over the longer-term CBDs sit at 9.9 per cent while non-CBD locations averaged 11.1 per cent per annum. These results vary considerably across states, with March 2023 results for CBDs ranging as low as -1.5 per cent total returns in Canberra, to 4.8 per cent for Brisbane’s CBD.” she said.
“Looking over a five-year average these rates vary from 6.3 per cent per annum in Perth’s CBD, through to 8.9 per cent for Melbourne’s CBD. Looking at non-CBD markets, total returns have been difficult for Parramatta down 0.7 per cent this period, however, over the last five years Parramatta averaged 9.5 per cent per annum ahead of North Sydney at 9.1 per cent per annum.”
Industrial vacancy rate hits new record low
The industrial property market has seen the vacancy rate hit another new record low despite projections of a surge in supply this year, according to a report by Knight Frank.
The Australian Industrial Review Q1 2023 found that Sydney is the tightest market in the East Coast with only 43,759 square metres available, a 51% contraction, while Melbourne has 174,330 square metres, and Brisbane has 226,592 square metres. The overall drop in vacancy across the major East Coast cities follows a 56% fall over the 2022 calendar year, and an 8% fall over Q4 2022 to see vacancy sit at 547,748 square metres.
Across Australia’s East Coast, there is almost 2 million square metres less space available now than the peak in October 2020, when there were 2,405,857 square metres available, equating to an 82% fall.
Knight Frank Partner, Research and Consulting, Jennelle Wilson, said take-up over the first quarter of 2023 was impacted by the limited opportunities on the market, being 26% below the three-year average, totalling 515,653 square metres. Ms Wilson said that there is an intense competition among tenants for limited available space resulted in further rental growth across all the Eastern Seaboard capital cities.
Ms Wilson added, “Brisbane led the quarterly rental growth by an 8.6% increase, followed by Sydney at 8.2%, with this city overtaking Perth for the fastest growing rents year on year, with prime rents up by 38% over 12 months. Adelaide and Perth reported 2.5% and two per cent rental growth over the same period, while Melbourne saw moderate growth of 1.5% on limited deals across most submarkets. Incentives continued to decline in Q1 and currently average 10% across the Eastern Seaboard, which stimulated stronger growth in effective rents over the quarter.”
According to Knight Frank data, both prime (340,921sqm) and secondary industrial space (103,760sqm) are at record lows as tenants compete for space. Knight Frank National Head of Industrial Logistics, James Templeton said ongoing strong tenant demand was being met with constrained supply, which had led to increased competition. “Secondary vacancy is now particularly low as tenants are grabbing immediately available options, with less of a concern regarding grade as long as it is functional,” Mr Templeton said.
“Prime vacancy is also seriously low, however, this grade is being somewhat replenished as speculative developments start construction. “Indeed, speculative space accounts for more than two-thirds of the current vacancy – with almost 194,500 square metres of this still under construction and not available for imminent occupation. As existing options have been absorbed, speculative developments have taken a greater weighting in available space.”
Mr Templeton said the gradual easing of material cost and supply chain pressures should aid the Eastern Seaboard supply pipeline, allowing it to reach a record of circa 2.5 million square metres in 2023. He added, “However, 43% of the pipeline is already pre-committed and 10% is owner occupied, so it is unlikely that we will see a significant amount of speculative space entering the market and alleviating the current widespread undersupply.”
5 things to consider before leasing business equipment
Starting or growing a business is always going to be a capital-intensive exercise, especially when the business relies on specialised equipment. Whether it’s industry-specific machinery, construction tools, or office essentials, acquiring the necessary assets can be a major financial undertaking.
One solution used by many businesses is to lease the equipment. By choosing to lease, businesses can spread out the cost of the equipment over several years through manageable monthly payments. Leasing can also provide the flexibility to upgrade or replace obsolete equipment. However, leasing comes with its drawbacks, including the interest expense, finding the right lease and navigating the paperwork. Here are five considerations to keep in mind if you’re thinking of leasing business equipment.
Before starting any type of lease agreement, it’s critical to identify exactly what equipment your business needs. Understand the latest models, read reviews, and consider warranty, repair, and delivery options. Also, anticipate when and how you will need to replace or upgrade the equipment. Knowledge is power when negotiating lease agreements, so research comparative prices to ensure you’re getting a fair deal.
Determine what your business can afford to spend on equipment each month. Recognising your financial constraints upfront can guide your leasing decisions and prevent you from over-committing yourself financially.
Leasing business equipment involves providing comprehensive financial information about your business. Prepare all relevant documentation in advance to help facilitate a smooth application process.
Familiarise yourself with the details of lease agreements, such as comparative interest rates and application fees. Understand what support the lessor provides and enquire about payment flexibility options if your business’s cash flow is variable. Some leasing companies offer buyout options at the end of the lease period, allowing you to purchase the equipment at a reduced price. Balance this against the cost of replacing old equipment and your company’s specific needs.
Assess the credibility of the lessor
Terms and conditions can vary significantly between leasing companies. Take the time to understand the credibility and reliability of potential lessors. Read customer reviews, verify their accreditations, and investigate the level of support they offer. Equipment malfunctions can disrupt business operations, so it’s important to understand the lessor’s warranty policies and the technical support available to you.
