The office market has enjoyed a sustained run of positive conditions – falling unemployment, rising business confidence and the growth in technology and business services have all contributed to stronger rents and lower vacancy rates. However this success has not translated to all markets, with the resource states of WA and Queensland lagging Victoria and NSW in performance, as they emerge from the post-mining boom era. But with economic conditions in the resource states showing a recovery upswing, is it time to consider them as office investment destinations again?
Our analysis shows Queensland and WA are in the early stages of economic recovery. Unemployment is falling, migration is rising and the withdrawal of mining investment capital is now no longer a drag on state growth. As a result, it is our view that this recovery may offer investors upside because it combines relatively higher yields with improving rental growth.
Sunnier in the Sunshine State
Looking at Brisbane first, we are starting to see robust signs of recovery such as falling vacancy rates, and indications rental growth is moving through that market.
The Brisbane office market is being boosted by strong demand from the Government sector which has recruited 8000 new employees over the last two years. That has helped drive a strong take up of office space, particularly at the prime end of the market.
Business conditions in Queensland are also picking up. They are now at a 10-year peak and higher than they were during the mining boom.
Engineering and mining investment is starting to increase again, and reflecting what we have seen in other states, we can expect to see growing employment in that market, particularly in the services sector.
In our view Brisbane represents good value – with the caveat that office assets are scarce at the moment.
WA emerging from its slump
Australian Bureau of Statistics figures show WA was the economy worst hit during the mining downturn with growth falling 7% two years ago. But it is well and truly out of its slump and we’ve seen economic growth starting to level at nearly 1%. Furthermore, we’re starting to see positive mining investment re-emerge in that market.
We’re also starting to see very positive supply conditions. Both our research and figures from JLL indicate that there will be barely 50,000sqm of new office space built in the Perth CBD in the next five years, which means that vacancy rates are likely to head down, pushing up rents.
While the recovery in Perth will be slower than the one in Brisbane, we think there is still value to be found in that market.
Growth and yield
Looking ahead, we believe the recovery in Perth and Brisbane will be sustained. Our house view is forecasting 4% effective rental growth across prime Brisbane office and 5% across Perth CBD in the next five years. This is in line with our Melbourne and Sydney CBD rental outlook over the same period, which will average 5% for both markets.
In addition to growth, Perth and Brisbane offer attractive yields. Our research tells us Sydney and Melbourne cap rates are in the low to mid 4% range, but prime office asset cap rates in Perth and Brisbane are in the high 5% range - and in some cases in the low 6% range - offering positive spreads of 50 to 100 basis points compared to Sydney and Melbourne.
A medium-term play
The recovery in the Perth and Brisbane markets will be a medium-term play.
But for investors looking to move outside the nexus of Sydney and Melbourne, based on the pricing we’re seeing and the improving economic signals emerging from Perth and Brisbane, there is upside both from an income and capital growth perspective.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.