Perth office market absorbs foreign funds

Business News

5th November 2018.

The greater volume of funding for commercial property is helping drive a push for diversification.

BROOKFIELD Property Partners remains Perth's biggest commercial landlord, with almost 190,000 square metres of office space under its control, as the level of foreign ownership of Perth's major office buildings continues to increase.

JLL data shows that foreign ownership, measured by square metres of office space in buildings of more than 5,ooosqm, increased from 26 per cent in 2008 to 41 per cent in 2018.

Australian institutional investment fell slightly, from 38 per cent to 36 per cent, and Perth private investor ownership fell from 17 per cent to 12 per cent.

Government ownership dropped from 14 per cent to 6 per cent over the same period.

JLL state manager WA John Williams said the weight of foreign capital in the global market compared with 10 years ago, combined with investors' desire for greater diversity following the GFC, was helping to drive the shift in ownership levels.

The prospective returns available from Perth's commercial real estate sector and a lower cost of capital enjoyed by foreign investors were secondary factors, he said.

"There is a greater amount of capital, and there is a greater need for diversification," Mr Williams told Business News.

"While the foreign capital might be coming in and buying assets, at the same time our capital is diversifying into other markets, and that is just the way the world is working these days."

Foreign buyers were also attracted by the transparency of Australia's commercial real estate market as well as the relative value of WA, helped by the cost of capital.

Sirona Capital managing director Matthew McNeilly said there was more interest from investors in Perth's commercial office space now than in the past five years.

"It's changing more rapidly than I think anyone had anticipated; there is lot more tenant demand and incentives have started to come down from an incredibly high peak," he said.

"It's making some deals actually start to stack up, and the important thing to note in the Perth office market is there just won't be any new supply for three to five years, because that is the type of lead times we are talking about for new development.

"It could tighten pretty quickly and that is encouraging us to take a look, but it is a finite market and others are also looking at it."

Mr McNeilly said the cost of capital issue was exacerbated by tightened lending practices in Australia.

"Unfortunately Australia is banked by national institutions that don't treat Australia as the two-speed economy it is," he said

"You tend to have decisions made in the east coast that can make things very hard in Western Australia."

Mr Williams agreed and said the Perth office market was well past the worst.

"I think the amount of net absorption of office space will surprise a lot of people when the numbers are tallied at the end of the year," he said.

"That will be confirmation that the market is heading in the right direction.

"With the current level of net-effective rents and capital values, we are significantly well below the economic cost of the replacement of buildings, so the market will ultimately correct and rents and capital values will increase.

"The other thing with Perth, it is more likely to hit return hurdles than other capital cities.

"Most investors have internal rate of return hurdles, which are a mixture of capital growth and cash returns, so you need capital returns to get those returns.

"In Sydney and Melbourne the perception is they have peaked, so you are not going to get that capital appreciation.

"So what other markets are at the bottom of the cycle where you are going to get some income growth from rent, as well as growth in capital values to hit your internal rate of return hurdles?"

Mr Williams said the spread between foreign and local investors in Perth's office market was not unusual, and would probably increase in coming years given current conditions.

Institutional investor Dexus is Perth's second largest landlord through its ownership of 240 St Georges Terrace and two towers at Kings Square on Wellington Street.

Local wholesale investor Primewest, founded by John Bond in 1994, is Perth's third largest investor in office space, although its 50 per cent share of Exchange Tower is on the market and expected to settle before the end of the year.