The Brisbane CBD office market hit a record high vacancy rate of 16.9 per cent in July 2016 as recorded by the Property Council of Australia. This was the highest rate recorded since the rates have been published in 1990. This record high vacancy rate is a result of the mining slowdown and public service cuts under the previous state government.
Since July 2016 the Brisbane office market has shown signs of a recovery with a recorded drop in the vacancy rate to 15.3 per cent in January 2017. This is the first downward movement in vacancy since July 2015. The reduction in the vacancy rate is a result of several factors including;
- A rising demand from state government tenants and education sector tenants, leading to an adsorption of a lot of the recent new supply,
- A reduction in space available for sub-lease,
- The withdrawal of buildings for alternative uses.
The reduction in vacancy rates was seen across the CBD and most of the fringe markets. In the fringe areas the Urban Renewal Area (Bowen Hills, Newstead, Fortitude Valley and Herston) showed the lowest vacancy rate of 9.9%, with Toowong 10.1%, Inner South 11.6%, and Spring Hill 15.0%, all below the CBD vacancy rate. The highest vacancy rate in the fringe was seen at Milton at 18.6% which was down from 20.5% six months earlier.
Interestingly, in the last twelve months, 32% of all leasing transactions above 500m2 in the fringe areas were from the resurgence of the Mining & Utilities & Industry sector. Following this sector was the Government & Community sector at 24% and Property and Business services at 18%.
The current market has seen a flight to quality with tenants taking advantage of the competitive rental rates in the CBD and fringe areas to relocate to more premium locations from their current suburban or fringe location.
Due to the increasing vacancy rate of late and recent negativity shown by investors towards the Brisbane office market the gap in yields between Brisbane and Sydney has widened to between 100 and 200 basis points. With typical Sydney office yields in the 5% to 6.5% range this presents a compelling argument as to the merits of investing in a Brisbane office market that appears to have moved past the peak of its current supply cycle and may present some counter cyclical opportunities.
Defensive Purchase Strategy
The fact that the Brisbane vacancy rate is still one of the highest in the 24 major office markets in Australia and was only recently at a record high, investors should be cautious and look to apply a defensive purchase strategy.
A defensive purchase strategy should include the following fundamental aspects;
- The building must be well located to transport and amenities. The building must be well-designed so as to be attractive to tenants.
- The property should have a point of difference to other buildings in the same area either through its location or design or both. The property should ideally be 100% leased with a WALE of over 3 years.
- A good mix of tenants to provide diversification of income.
- The current leases should ideally have staggered lease expiries to reduce the impact of future vacancies occurring at the same time.
- The passing rents should be at current market rates and if not then this should be allowed for in the purchase price.
How Prosper Group assisted their client with a counter cyclical purchase in the Brisbane office market
Prosper Group recently assisted one of their NSW clients in purchasing an office investment in Greenslopes (Brisbane Inner South fringe area). The strategy was to purchase a property with good fundamentals that would underpin future capital growth and be 100% leased with a long WALE to ride out the current high vacancy cycle.
The property had the following fundamentally defensive features;
- Well located only 5km to the CBD and at the end of a busy retail strip know as Stones Corner.
- Good exposure to Logan Rd.
- 100% leased to 3 tenants with a WALE of 4.3 years.
- 53% of the area is leased to a Government tenant.
- Recently refurbished building with a new lift, façade upgrade and part of the air
Prosper Group’s client was very happy that the property provided them with a defensive investment with future growth potential. Most pleasing was the yield of 8.6%, where if they were to purchase a similar type of investment in Sydney, the yield would have most likely been between 5.5% and 6.5%.
The below link will provide further information on this purchase;
If you would like further information on the Brisbane office market or you would be interested in purchasing a commercial investment in Brisbane, please contact Prosper Group to discuss how we can assist.