CANBERRA OFFICE
RESEARCH
APRIL 2011
CANBERRA OFFICE Market Overview
HIGHLIGHTS •
The Canberra market is becoming increasingly two tiered as the volume of new supply that has been reasonably well received by the market places pressure on secondary assets. The total vacancy rate is forecast to have peaked, although over the next two years the reduction in vacancies will be gradual with several major projects due to complete in 2012.
•
While A-grade rents are stabilising, they are forecast to remain flat in 2011. Incentives are currently at cyclical highs, however with vacancies at elevated levels and a number of developers seeking precommitments for DA approved projects, incentives are unlikely to moderate before 2012.
•
Despite the presence of buyer interest for A-grade assets underpinned by Government leases, transaction activity has been subdued as owners remain comfortable holding onto assets. It is estimated that A-grade yields remain stable in the range of 7.5% to 8.5%. NABERS ratings are increasingly becoming a critical driver of value in the Canberra market, particularly given Government commitments to environmental efficiencies. This will support modern, A-grade assets, however owners of secondary stock are faced with a decision to either upgrade assets or lease in a less conducive secondary market.
APRIL 2011
CANBERRA OFFICE Market Overview
CANBERRA MARKET OVERVIEW Table 1
Canberra Commercial Market Indicators as at April 2011 Market
Total Stock (m²)^
Vacancy Rate (%)^
Annual Net Absorption (m²)^
Annual Net Additions (m²)^
Average Gross Face Rent ($/m²)
Civic (city)
259,074
10.2
37,935
71,187
415
9%
7.50 - 8.50
Barton*
219,915
3.6
44,806
49,307
419
9%
7.50 - 8.50
Town Centres*
496,013
14.1
11,100
48,981
376
11%
7.75 - 9.00
Airport
153,564
31.5
-17,850
0
372
14%
n/a
Average Incentive (%)
Average Core Market Yield (%)
A Grade
Secondary Civic (city)
420,581
18.7
-27,840
7,651
363
13%
8.75 - 10.00
Barton*
n/a
n/a
n/a
n/a
378
11%
8.75 - 10.00
Town Centres*
n/a
n/a
n/a
n/a
310
13%
9.25 - 10.50
Total Market#
2,204,249
13.4
61,762
198,925
Core Market Yield:
The percentage return/yield analysed when the assessed fully leased net market income is divided by the adopted value/price which has been adjusted to account for property specific issues (i.e. rental reversions, rental downtime for imminent expiries, capital expenditure, current vacancies, incentives, etc).
Town Centres:
Includes the Phillip, Tuggeranong and Belconnen office precincts
Source: Knight Frank/PCA ^ as at Jan 2011
*Stock, vacancy and absorption figure quoted for total stock only as PCA do not provide breakdown by grade #Includes additional sub markets as well as above major listed markets
SUPPLY & DEVELOPMENT ACTIVITY The rate of new supply in the Canberra market
2011 will see a temporary respite in new
Avenue, Parkes will add 40,000m² (fully pre-
picked up over 2010 with a net supply of
supply with only two major new projects
committed).
183,933m² added in the 12 months to January
scheduled to complete. Both of these projects
2011. Over 90% of this supply was added in
are located at the airport and total 46,840m².
the first half of the year.
The other main supply consists of the
The two largest projects to complete in 2010 were purpose built for government tenants. The first was the Mirvac developed Sirius Building at 23 Furzer Street, Woden, which added 46,167m² of NLA for the Department of
7,500m² refurbishment of ActewAGL House in Civic, which is close to completion, however with relatively small floor plates of 700m² will be targeted towards smaller tenants and privates.
Health and Ageing (DoHA). In the second
Supply will pick up again in 2012 with
quarter, Walker Corporation completed
93,200m² of new NLA projected to complete.
39,817m² at 50 Marcus Clarke Street for the
In Barton, the West and East developments at
Department of Education, Employment and
4 National Circuit will add 18,000m² and
Workplace Relations (DEEWR). At the same
11,600m² in the second and third quarters of
time, and also in Civic, 121 Marcus Clarke
2012 respectively. In the fourth quarter, Nishi
Street was completed by MTAA adding
Towers, located in Edinburgh Avenue, Civic
26,000m² of NLA to the market.
will add 21,000m² and the ASIO Headquarters, located in Constitution
2
Beyond 2012, a number of development projects sit in the pipeline, including DOMA Group’s development in Canberra Avenue, Forrest, the Willemsen Group Development, also in Canberra Avenue and 28 Sydney Avenue, sold at auction recently to BDC ACT. Despite a number of potential projects in the Civic precinct, supply is likely to lag the Barton precinct. One factor behind this is the formal termination by DEEWR for their requirement of 32,000m² of new space. Previously Amalgamated Property Group’s (APG) 38 Akuna Street and Mirvac’s Section 63 site had been short listed as purpose built options.
www.knightfrank.com
4 National Circuit - West, Barton - 18,000m² ISPT - Q2 2012 - 44% committed (Attorney General)
7
4 National Circuit - East, Barton - 11,600m² ISPT - Q3 2012 - uncommitted
8
Nishi Towers^ - 21,000m² (Dept of Climate Change) Molonglo Group - Q4 2012 - 57% committed
9
ASIO HQ, Constitution Ave, Parkes - 40,000m² (ASIO) Federal Govt - Q4 2012 - 100% committed
10
1 Canberra Ave, Forrest - 24,500m² Willemsen Group - Q2 2013+ seeking pre-commit
11
Vernon North - Building 4, London Circuit^ - 25,000m² Leighton/Mirvac JV - 2013+ seeking pre-commit
12
Signature Building 2, London Circuit^ - 16,000m² Leighton/Mirvac JV - 2013+ seeking pre-commit
13
St John’s Ambulance site, Forrest - 14,000m² Doma Group - 2013+ seeking pre-commit
19 slie Ain
2
Ave
Cir cuit
12 1121 20
St una Ak 23
24
Ave gh bur
Co ns t
8
Park e
s W ay
itu tio n
de
6
22
1
ra
5
3-7 Molonglo Drive, Airport - 34,000m² Capital Airport Group - 2011 uncommitted
Av e
Pa
15 Lancaster Ave, Majura (Airport) - 12,840m² Capital Airport Group - Q1 2011 uncommitted
An za c
4
Northbo urne Ave
Equinox Business Park, 70 Kent St, Deakin - 22,000m² Evri Group - Q4 2010 - 50% committed (Thales)
ealth Ave
3
14
Commonw
121 Marcus Clarke St^ - 26,000m² (EY) MTAA - compl. Q2 2010 - 40% committed
cu sC Lo la nd rke on
2
MAJOR OFFICE SUPPLY
Ma r
50 Marcus Clarke St^ - 39,817m² (DEEWR) Walker Group - compl. Q2 2010 - 100% committed
Edi n
1
17 9
71 Constitution Ave, Campbell - 20,000m² Hindmarsh Group - 2013+
18
York Park North, Brisbane Ave, Barton - 65,000m² Dept. Finance and Deregulation - 2013+
19
Precinct D Section 84^ - 30,000m² QIC - 2013+
20
Landmark Building, London Circuit^ - 50,000m² Leighton/Mirvac JV - 2014+
21
Vernon South - Building 3, London Circuit^ - 25,000m² Leighton/Mirvac JV - 2014+
22
Myuna Complex, Northbourne Ave^ - 48,297m² Stockland - Q2 2014+
23
The Boulevard^ - 16,500m² Lend Lease - 2014+
24
Section 4^ - 58,000m² ACT Government - 2014+
25
28 Sydney Avenue, Forrest - 24,000m² BDC ACT - 2014+
Ave gs Kin
le
6 7
18 Airport Brisbane
South West
3 15 16
Ave
4 5
e at St
25 10 13
e Av
Under Construction/Complete
rc Ci
Cir cle
17
Commonw
162 Callam St, Phillip - 18,000m² Hindmarsh Group - 2013+
te
16
Sta
45 Furzer St, Phillip - 22,000m² Doma Group - 2013
Me lbo ur ne Av e
15
ra
Anzac Park East, Parkes - 12,534m² Federal Govt - 2012+
er nb Ca
14
ealth Ave
#
DA Approved / Confirmed / Site Works Mooted / Early Feasibility NB. Dates are Knight Frank Research estimates * Major tenant precommitment in brackets
Map source: ACT Planning and Land Authority (ACTMAPi)
# Major refurbishment ^ Civic Office NLA quoted
3
APRIL 2011
CANBERRA OFFICE Market Overview
TENANT DEMAND & RENTS Overall demand in Canberra has been sporadic with net positive absorption in the 12 months to January 2011 of 61,762m², a figure almost 10,000m² more than the 10 year average, however skewed due to precommitments. Recent demand induced a modest fall in the vacancy rate to 13.4% as at January 2011 from the 14.1% recorded in July last year. However, the completion of some major pre-committed projects in the Civic and Barton precincts underpinned much stronger net absorption for higher grade stock. Agrade recorded positive net absorption of 64,768m² meaning that the secondary market actually recorded a negative net absorption figure for the past year demonstrating the divergent performance between asset grades.
NET POSITIVE ABSORPTION… OF 61,762M²… ALMOST 10,000M² MORE THAN THE 10 YEAR AVERAGE Supporting the take up of new developments has been that, aside from stock within the Airport precinct, projects have not progressed without significant pre-commitments. Demand for new stock has been further enhanced by government emphasis on building efficiency with a requirement for new leases to have minimum 4.5 star NABERS ratings. However offsetting this to an extent has been the Government target of reducing tenancy area per worker to 16m² and some cost pressures stemming from the
4
commitment to return the federal budget to
targets for developers seeking pre-
surplus by 2012/13.
commitment in the next two years include AGS, Department of Sustainability,
Figure 1
Environment, Water, Population and
Vacancy by Grade
Communities, Australian Border Protection
Canberra Region (%) 40
Service and the Department of Broadband
(%)
Communications and Digital Economy. 37.236.0
35 30
Following the sharp pick up in the vacancy
25
rate after the surge in supply during the first half of 2010, the vacancy rate is expected to
20
gradually decline over the next few years with
15 10
Anticipated Vacancy Levels
14.1 13.4
13.7
15.5
17.1
new projects not expected to commence without significant pre-commitment. Pre-
11.0
commitments for the major projects that will
8.1 8.1
5
come online in 2012 include the Attorney
0 A Grade
B Grade
Total
Vacancy at Jul-10
C Grade
D Grade
Vacancy at Jan-11
Source: Property Council Australia
The consequences of a healthy supply pipeline and stronger tenant demand for Agrade stock are the higher vacancy rates for
General’s Department committing to 8,000m² at 4 National Circuit West, the Department of Climate Change committing to 12,000m² at Nishi Towers and the 40,000m² ASIO HQ development being 100% committed. As yet, the 4 National Circuit East building (11,600m²) remains uncommitted.
secondary stock, which currently measures
The major pending backfill option will stem
15.0%. While total A-grade vacancy measures
from The Department of Climate Change
11.0%, the vacancy is a much tighter 6.5%
vacating approximately 9,000m² at 2
excluding the Airport precinct.
Constitution Avenue in 2012 when they move
Tenant Demand Illustrating the appetite for new developments were the two largest projects to reach completion over 2010, the Sirius Building in Woden, and 50 Marcus Clarke, which were both 100% pre-committed to government entities on 15 year lease terms. Other major developments have also enjoyed robust absorption. At 121 Marcus Clarke, following major leases with Ernst and Young and ISIS, all but one of the tower levels are now fully leased, however only one floor below the tower has been committed at this stage. At Equinox Business Park, the major tenant Thales absorbed 4,000m², however with smaller leases totalling almost 7,000m², the residual space of approximately 11,000m² remains vacant. Lease expiries in the medium term that could influence potential demand and are possible
into Nishi Towers as well as some small additional residual backfill space at 1 and 5 Farrell Place. The consolidation of the constituent departments of DEEWR into 50 Marcus Clarke involved vacating 20,000m² at the Airport, which was leased until November 2011 and is currently available as sub-lease space. The Attorney General’s Department will cease some leases in older buildings in Barton when they relocate opposite their major tenancy at 4 National Circuit. Additionally, there is the potential upside for withdrawal volumes as owners of secondary stock are faced with the choice of either upgrading premises or leasing in the weaker secondary market. Some owners are also looking at residential conversions. For example 38 Akuna Street, which consists 12,522m² of commercial space, is being redeveloped into a 16 level residential tower consisting of 330 units with construction expected to commence in June 2011.
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Rental Levels The rise in Canberra vacancies is flowing through to the rental market with the relatively shallow depth of tenants compared to leasing options placing downward
with Civic secondary incentives approaching
12 months to now average $372/m². The
13% compared to 11% for Barton. The rental
precinct continues to reflect high vacancies
outlook for Barton appears more robust given
with incentives ranging from 12% to 17%.
the tighter vacancy profile in addition to it’s attraction to government organisations.
Figure 2
A-Grade Gross Rents and Incentives By region ($/m2)
pressure on rents, particularly with regards to
In Town Centres, the tenancy profiles that are
average incentive levels. Incentives are
underpinned by one or two government
450
impacting more heavily upon secondary
departments, such as Woden with Health or
400
stock, where higher vacancies are forcing
Tuggeranong with Human Services
350
owners to become increasingly competitive to
(Centrelink, Medicare), has meant that rents
300
secure tenants. A-grade gross effective rents
have held up relatively well. Gross face rents
250
have moderated between 1.0% and 2.5% over
for A-grade property now average $376/m²
200
the last 12 months, however have shown
and have been broadly flat since April 2010.
150
signs of stabilising over the last two quarters.
Higher rents are achievable for new stock,
100
Gross face rents average $419/m² in Barton
Civic and Barton both range from 8% to 10%.
continue to experience downward pressure.
Civic’s secondary vacancy rate of 18.7% has
At the Airport precinct, A-grade gross face
caused some disparity between precincts
rents decreased a little over 1% over the last
Gross Effective Prime rents
Airport
secondary rents in the Town Centres will
conditions in Barton. A-grade incentives in
Town Centres
gross rent of $395/m². Indications are that
0
Barton
which is reflective of the tighter market
commenced in February 2010 equating to a
50 Civic
and are marginally higher compared to Civic,
with DoHA’s lease at the Sirius Building that
Incentive
Source: Knight Frank
Table 2
Recent Leasing Activity
(New leases over 500m² and significant renewals over 1,000m²) Canberra
Address 51 Allara Street
Region
Area (sq m)
Face Rental ($/m²)
Term (yrs)
Lease Type
Tenant
Start Date
City
7,879
396g
10
Renewal
DRET
Jul-11
Greenway
3,835
345g
9
New
Medicare
Jul-11
121 Marcus Clarke Street
City
1,427
U/D
8
New
ARIA
Jul-11
121 Marcus Clarke Street
City
850
U/D
8
New
Brown Consulting
Feb-11
150 Soward Way, Tuggeranong
212 Northbourne Avenue
Braddon
1,220
390g
5.3
New
Datacom
Jan-11
243 Northbourne Avenue
Lyneham
1,043
345g
7
New
SMEC
Jan-11
Scollay Street
Greenway
760
365g
3
New
Human Services
Dec-10
City
1,328
385g
10
Renewal
St George
Oct-10
Fyshwick
750
260g
5
New
Dept Finance
Oct-10
70 Kent Street
Deakin
712
425g
10
New
Canberra Sleep Lab
Sep-10
70 Kent Street
Aug-10
60 Marcus Clarke Street Dairy Road
Deakin
3,788
430g
8
New
Thales
1-3 Constitution Avenue
City
7,506
385g
10
Renewal
ACT Government
Jul-10
121 Marcus Clarke Street
City
2,796
U/D
12
New
Ernst & Young
Jul-10 Jul-10
121 Marcus Clarke Street
City
1,398
U/D
10
New
ISIS
Braddon
931
365g
5
New
Commonwealth Grants Comm.
Jul-10
14 Childers Street
City
970
445g
7
New
Sparke Helmore
Jun-10
15 National Circuit
Barton
935
430g
5
New
CSC
Jun-10
10 National Circuit
Barton
786
380g
5
New
Computer Associates
Jun-10
14 Childers Street
City
1,923
407g
12
New
Legal Aid
Apr-10
86-88 Northbourne Avenue
54 Marcus Clarke Street
City
507
375g
5
New
Synergy IT
Apr-10
39 Brisbane Avenue
Braddon
641
427g
2
New
Treasury
Mar-10
82 Northbourne Avenue
Braddon
987
410g
5
New
AFP
Feb-10
City
1,257
430g
7
New
Australian Reinsurance Pool Corp
Jan-10
14 Childers Street Source: Knight Frank
g gross
U/D refers undisclosed
5
APRIL 2011
CANBERRA OFFICE Market Overview
INVESTMENT ACTIVITY & YIELDS A very limited number of investment sales
leases, while the growing importance of
The most significant CBD transaction in 2010
have been recorded in the Canberra market
environmental ratings will support assets
was the AusAid Building that was bought by
over the past year. While nationally
with green credentials. This trend is reflected
Emboss Capital from Orchard Funds
transactions picked up after a sharp decline
in the latest IPD Green Index, which showed
Management for $55.2m in December 2010.
in 2008 and 2009, the Canberra market hass
that over the two years to December 2010,
Occupied entirely by AusAid, the lease
behaved differently, with 2010 transactions
total returns for office assets with Green Star
expires in 2022 plus two 5 year options. The
levels below that recorded in the two previous
ratings or NABERS ratings in excess of four
lengthy WALE was reflected by the transaction
years.
stars have outperformed the broader market.
equating to a core market yield of 7.25%.
Figure 3
Figure 4
Value of Transactions (over $10m)
Canberra Regions
Canberra Office Investment Sales 1,000
rating a 4 star NABERS Energy rating, the sale
Average A-grade Core Market Yields
$m
900 800 700
assets with strong WALEs currently trade. The other major A-grade transaction was the
8.5%
purchase of 6 National Circuit, Barton by
8.0%
Doma Group for $19.2m. Doma purchased the
7.5%
500
7.0%
400
exemplifies the premium at which modern
9.0%
600
4.5 NABERS rated building on a vacant possession basis with the building still being untenanted. The $/m² rate of $3,108 was
6.5%
300
relatively low for an A-grade asset, however
6.0%
200
was reflective of the underlying circumstances of the sale.
5.5%
100
In December, 2010, Pharmacy Guild House in
Jan-11
number of assets are currently being
Jul-10
Centres are on average 25bps softer. While a
Jan-10
between 7.5% and 8.5%, while yields in Town
Jul-09
grade yields in Civic and Barton now ranging
Barton
Jan-09
Yields have remained flat with average A-
Jul-08
Civic
Jan-08
Jul-07
Jan-07
Source: ource: Knight Frank
Jul-06
20 10
2009
2008
2007
2006
Jan-06
5.0 % 2005
0
Developed in 2008 and with a 5-star Green
Barton was sold by Guild of Australia to KDN
Tow n Ce ntres
Group for $25.1m. The sale benefitted from a five year WALE, however demonstrated the
Source: Knight Frank
yield differential between asset grades, with the B-grade asset trading at a core market
As investment activity returns, it is anticipated that a distinct ranking will emerge between A-grade and secondary yields and in
In terms of land sales, a Canberra
the absence of a strong lease expiry profile,
marketed, marketed, existing owners appear comfortable to hold assets until they can execute on a satisfactory yield. Assets that stand to outperform include those which are underpinned by long term government
development syndicate BDC ACT has paid
yields can push out significantly. Secondary yields are estimated to range on average from from 8.75% to 11.00%, depending upon quality and income profile.
yield of 8.95%.
$6.8m for a 4,498m² vacant site in Forrest, which will allow for a new office development of up to 24,000m² that will likely be targeted towards a government tenant.
Table 3
Recent Sales Activity
Canberra
NLA (m²)
$/m² NLA
Vendor
Purchaser
Sale Date
6.80
Core Market Yield (%) n/a
4,498*
1,512*
Land Development Agency
BDC ACT
Mar-11
B
25.06
8.95
6,532
3,857
Guild of Australia
KDN Group
Dec-10
AusAid Building, 255 London Circuit, Civic
A
55.20
7.25
9,167
6,022
Orchard Funds Management
Emboss Capital
Dec-10
6 National Circuit, Barton
A
19.20
VP
6,178
3,108
Masonic Centre
Doma Group
Aug-10
Address
Grade
Price ($ mil)
28 Sydney Avenue, Forrest
Site
Pharmacy Guild House, 15 National Circuit, Barton
Source: Knight Frank
6
*site and $/m² site
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OUTLOOK
therefore likely that vacancy pressures will
residential, other alternative uses or site
remain on older stock as tenants move to new
consolidation.
premises that, in the case of government entities, meet minimum environmental
The discrepancy that exists between A-grade and secondary stock in the Canberra market is forecast to continue shaping asset performance. While WALE remains critical to value, the high proportion of Government tenants and their commitments to sustainability will support assets with green credentials. NABERS ratings will be a key driver of performance and a likely impediment for lower grade stock.
sustainability criteria. Government tenants have been keen to commission purpose built office buildings as part of their commitment to improve efficiency, both economically and environmentally. However the availability of a number of A-grade vacancies provide alternative options for tenants, which could
returns in 2012.
6.0% 4.0%
50
2.0%
ratings, owners of secondary stock will be faced with a decision of whether to upgrade
0
0.0%
six months to
or try and lease an asset in an environment of
New supply (LHS)
high secondary vacancy. As an alternative,
Vacancy rate (RHS)
there is the potential that some older stock
Source: PCA/Knight Frank
could be redeveloped or repositioned as
Jan-13
over 2011, before effective rental growth
8.0 % 100
Jan-12
upward pressure will remain on incentives
10.0%
150
number of projects in the pipeline.
With the growing importance of NABERS
14.0% 12.0%
Jan-11
secure pre-commitments, some modest
200
Jan-10
surplus by 2012/13. As developers look to
pro jected
Jan-09
commitment to return the national budget to
16.0%
250
Jan-08
currently available and the Government
Canberra Region (000s m²)
Jan-07
2011 given the depth of tenancy options
Vacancy Rate vs Gross Supply
assist to absorb current vacancies and also push out the expected completion of a
Face rents are forecast to remain flat over
Figure 6
Reburbished (LHS)
Figure 5
A-grade Gross Effective Rents Civic and Barton Average ($/m²) 440 P ro jected
420 400 380 360 340 320 300 280
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
260
Source: Knight Frank
After a sharp run up in vacancies to mid 2010, it is forecast that the 14.1% achieved in July 2010 will represent the peak in the cycle. The
current vacancy rate of 13.4% is expected to gradually decline, however will remain above
12% for the next two years. While there are a number of development sites in Canberra,
particularly within the Civic precinct, these developments will not proceed without a
satisfactory level of pre-commitments. It is
121 Marcus Clarke, Civic. Owned by MTAA Super, the 26,000m² project was completed in Q2 2010. The building is targeted to achieve a rating of 4.5 NABERS Energy and has been awarded a 5 Star Green Star.
7
RESEARCH
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8
Knight Frank Research Nick Hoskins Research Manager - NSW +61 2 9036 6766 [email protected]
Commercial Agency Contacts Terry Daly Managing Director, Canberra +61 2 6221 7869 [email protected]
Matt Whitby National Director – Research +61 2 9036 6616 [email protected]
Nicola Cooper Director, Leasing +61 2 6221 7861 [email protected]
Jennelle Wilson Associate Director – Research QLD +61 7 3246 8830 [email protected]
Daniel McGrath Manager, Commercial Sales/Leasing +61 2 6221 7882 [email protected]
Justin Mahnig Research Manager - Vic +61 3 9604 4713 [email protected]
Pip Doogan Leasing Executive +61 2 6221 7879 [email protected]
Matthew Mason Research Analyst –SA +61 8 8233 5232 [email protected] Alison Smith Research Analyst - WA +61 8 9225 2434 [email protected]
Knight Frank Research provide strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, financial and corporate institutions. All recognise the need for the provision of expert independent advice customised to their specific needs. Knight Frank Research reports are also available at www.knightfrank.com. © Knight Frank 2011 This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not permitted without prior consent of, and proper reference to Knight Frank Research.
APRIL 2011
CANBERRA OFFICE Market Overview
HIGHLIGHTS •
The Canberra market is becoming increasingly two tiered as the volume of new supply that has been reasonably well received by the market places pressure on secondary assets. The total vacancy rate is forecast to have peaked, although over the next two years the reduction in vacancies will be gradual with several major projects due to complete in 2012.
•
While A-grade rents are stabilising, they are forecast to remain flat in 2011. Incentives are currently at cyclical highs, however with vacancies at elevated levels and a number of developers seeking precommitments for DA approved projects, incentives are unlikely to moderate before 2012.
•
Despite the presence of buyer interest for A-grade assets underpinned by Government leases, transaction activity has been subdued as owners remain comfortable holding onto assets. It is estimated that A-grade yields remain stable in the range of 7.5% to 8.5%. NABERS ratings are increasingly becoming a critical driver of value in the Canberra market, particularly given Government commitments to environmental efficiencies. This will support modern, A-grade assets, however owners of secondary stock are faced with a decision to either upgrade assets or lease in a less conducive secondary market.
APRIL 2011
CANBERRA OFFICE Market Overview
CANBERRA MARKET OVERVIEW Table 1
Canberra Commercial Market Indicators as at April 2011 Market
Total Stock (m²)^
Vacancy Rate (%)^
Annual Net Absorption (m²)^
Annual Net Additions (m²)^
Average Gross Face Rent ($/m²)
Civic (city)
259,074
10.2
37,935
71,187
415
9%
7.50 - 8.50
Barton*
219,915
3.6
44,806
49,307
419
9%
7.50 - 8.50
Town Centres*
496,013
14.1
11,100
48,981
376
11%
7.75 - 9.00
Airport
153,564
31.5
-17,850
0
372
14%
n/a
Average Incentive (%)
Average Core Market Yield (%)
A Grade
Secondary Civic (city)
420,581
18.7
-27,840
7,651
363
13%
8.75 - 10.00
Barton*
n/a
n/a
n/a
n/a
378
11%
8.75 - 10.00
Town Centres*
n/a
n/a
n/a
n/a
310
13%
9.25 - 10.50
Total Market#
2,204,249
13.4
61,762
198,925
Core Market Yield:
The percentage return/yield analysed when the assessed fully leased net market income is divided by the adopted value/price which has been adjusted to account for property specific issues (i.e. rental reversions, rental downtime for imminent expiries, capital expenditure, current vacancies, incentives, etc).
Town Centres:
Includes the Phillip, Tuggeranong and Belconnen office precincts
Source: Knight Frank/PCA ^ as at Jan 2011
*Stock, vacancy and absorption figure quoted for total stock only as PCA do not provide breakdown by grade #Includes additional sub markets as well as above major listed markets
SUPPLY & DEVELOPMENT ACTIVITY The rate of new supply in the Canberra market
2011 will see a temporary respite in new
Avenue, Parkes will add 40,000m² (fully pre-
picked up over 2010 with a net supply of
supply with only two major new projects
committed).
183,933m² added in the 12 months to January
scheduled to complete. Both of these projects
2011. Over 90% of this supply was added in
are located at the airport and total 46,840m².
the first half of the year.
The other main supply consists of the
The two largest projects to complete in 2010 were purpose built for government tenants. The first was the Mirvac developed Sirius Building at 23 Furzer Street, Woden, which added 46,167m² of NLA for the Department of
7,500m² refurbishment of ActewAGL House in Civic, which is close to completion, however with relatively small floor plates of 700m² will be targeted towards smaller tenants and privates.
Health and Ageing (DoHA). In the second
Supply will pick up again in 2012 with
quarter, Walker Corporation completed
93,200m² of new NLA projected to complete.
39,817m² at 50 Marcus Clarke Street for the
In Barton, the West and East developments at
Department of Education, Employment and
4 National Circuit will add 18,000m² and
Workplace Relations (DEEWR). At the same
11,600m² in the second and third quarters of
time, and also in Civic, 121 Marcus Clarke
2012 respectively. In the fourth quarter, Nishi
Street was completed by MTAA adding
Towers, located in Edinburgh Avenue, Civic
26,000m² of NLA to the market.
will add 21,000m² and the ASIO Headquarters, located in Constitution
2
Beyond 2012, a number of development projects sit in the pipeline, including DOMA Group’s development in Canberra Avenue, Forrest, the Willemsen Group Development, also in Canberra Avenue and 28 Sydney Avenue, sold at auction recently to BDC ACT. Despite a number of potential projects in the Civic precinct, supply is likely to lag the Barton precinct. One factor behind this is the formal termination by DEEWR for their requirement of 32,000m² of new space. Previously Amalgamated Property Group’s (APG) 38 Akuna Street and Mirvac’s Section 63 site had been short listed as purpose built options.
www.knightfrank.com
4 National Circuit - West, Barton - 18,000m² ISPT - Q2 2012 - 44% committed (Attorney General)
7
4 National Circuit - East, Barton - 11,600m² ISPT - Q3 2012 - uncommitted
8
Nishi Towers^ - 21,000m² (Dept of Climate Change) Molonglo Group - Q4 2012 - 57% committed
9
ASIO HQ, Constitution Ave, Parkes - 40,000m² (ASIO) Federal Govt - Q4 2012 - 100% committed
10
1 Canberra Ave, Forrest - 24,500m² Willemsen Group - Q2 2013+ seeking pre-commit
11
Vernon North - Building 4, London Circuit^ - 25,000m² Leighton/Mirvac JV - 2013+ seeking pre-commit
12
Signature Building 2, London Circuit^ - 16,000m² Leighton/Mirvac JV - 2013+ seeking pre-commit
13
St John’s Ambulance site, Forrest - 14,000m² Doma Group - 2013+ seeking pre-commit
19 slie Ain
2
Ave
Cir cuit
12 1121 20
St una Ak 23
24
Ave gh bur
Co ns t
8
Park e
s W ay
itu tio n
de
6
22
1
ra
5
3-7 Molonglo Drive, Airport - 34,000m² Capital Airport Group - 2011 uncommitted
Av e
Pa
15 Lancaster Ave, Majura (Airport) - 12,840m² Capital Airport Group - Q1 2011 uncommitted
An za c
4
Northbo urne Ave
Equinox Business Park, 70 Kent St, Deakin - 22,000m² Evri Group - Q4 2010 - 50% committed (Thales)
ealth Ave
3
14
Commonw
121 Marcus Clarke St^ - 26,000m² (EY) MTAA - compl. Q2 2010 - 40% committed
cu sC Lo la nd rke on
2
MAJOR OFFICE SUPPLY
Ma r
50 Marcus Clarke St^ - 39,817m² (DEEWR) Walker Group - compl. Q2 2010 - 100% committed
Edi n
1
17 9
71 Constitution Ave, Campbell - 20,000m² Hindmarsh Group - 2013+
18
York Park North, Brisbane Ave, Barton - 65,000m² Dept. Finance and Deregulation - 2013+
19
Precinct D Section 84^ - 30,000m² QIC - 2013+
20
Landmark Building, London Circuit^ - 50,000m² Leighton/Mirvac JV - 2014+
21
Vernon South - Building 3, London Circuit^ - 25,000m² Leighton/Mirvac JV - 2014+
22
Myuna Complex, Northbourne Ave^ - 48,297m² Stockland - Q2 2014+
23
The Boulevard^ - 16,500m² Lend Lease - 2014+
24
Section 4^ - 58,000m² ACT Government - 2014+
25
28 Sydney Avenue, Forrest - 24,000m² BDC ACT - 2014+
Ave gs Kin
le
6 7
18 Airport Brisbane
South West
3 15 16
Ave
4 5
e at St
25 10 13
e Av
Under Construction/Complete
rc Ci
Cir cle
17
Commonw
162 Callam St, Phillip - 18,000m² Hindmarsh Group - 2013+
te
16
Sta
45 Furzer St, Phillip - 22,000m² Doma Group - 2013
Me lbo ur ne Av e
15
ra
Anzac Park East, Parkes - 12,534m² Federal Govt - 2012+
er nb Ca
14
ealth Ave
#
DA Approved / Confirmed / Site Works Mooted / Early Feasibility NB. Dates are Knight Frank Research estimates * Major tenant precommitment in brackets
Map source: ACT Planning and Land Authority (ACTMAPi)
# Major refurbishment ^ Civic Office NLA quoted
3
APRIL 2011
CANBERRA OFFICE Market Overview
TENANT DEMAND & RENTS Overall demand in Canberra has been sporadic with net positive absorption in the 12 months to January 2011 of 61,762m², a figure almost 10,000m² more than the 10 year average, however skewed due to precommitments. Recent demand induced a modest fall in the vacancy rate to 13.4% as at January 2011 from the 14.1% recorded in July last year. However, the completion of some major pre-committed projects in the Civic and Barton precincts underpinned much stronger net absorption for higher grade stock. Agrade recorded positive net absorption of 64,768m² meaning that the secondary market actually recorded a negative net absorption figure for the past year demonstrating the divergent performance between asset grades.
NET POSITIVE ABSORPTION… OF 61,762M²… ALMOST 10,000M² MORE THAN THE 10 YEAR AVERAGE Supporting the take up of new developments has been that, aside from stock within the Airport precinct, projects have not progressed without significant pre-commitments. Demand for new stock has been further enhanced by government emphasis on building efficiency with a requirement for new leases to have minimum 4.5 star NABERS ratings. However offsetting this to an extent has been the Government target of reducing tenancy area per worker to 16m² and some cost pressures stemming from the
4
commitment to return the federal budget to
targets for developers seeking pre-
surplus by 2012/13.
commitment in the next two years include AGS, Department of Sustainability,
Figure 1
Environment, Water, Population and
Vacancy by Grade
Communities, Australian Border Protection
Canberra Region (%) 40
Service and the Department of Broadband
(%)
Communications and Digital Economy. 37.236.0
35 30
Following the sharp pick up in the vacancy
25
rate after the surge in supply during the first half of 2010, the vacancy rate is expected to
20
gradually decline over the next few years with
15 10
Anticipated Vacancy Levels
14.1 13.4
13.7
15.5
17.1
new projects not expected to commence without significant pre-commitment. Pre-
11.0
commitments for the major projects that will
8.1 8.1
5
come online in 2012 include the Attorney
0 A Grade
B Grade
Total
Vacancy at Jul-10
C Grade
D Grade
Vacancy at Jan-11
Source: Property Council Australia
The consequences of a healthy supply pipeline and stronger tenant demand for Agrade stock are the higher vacancy rates for
General’s Department committing to 8,000m² at 4 National Circuit West, the Department of Climate Change committing to 12,000m² at Nishi Towers and the 40,000m² ASIO HQ development being 100% committed. As yet, the 4 National Circuit East building (11,600m²) remains uncommitted.
secondary stock, which currently measures
The major pending backfill option will stem
15.0%. While total A-grade vacancy measures
from The Department of Climate Change
11.0%, the vacancy is a much tighter 6.5%
vacating approximately 9,000m² at 2
excluding the Airport precinct.
Constitution Avenue in 2012 when they move
Tenant Demand Illustrating the appetite for new developments were the two largest projects to reach completion over 2010, the Sirius Building in Woden, and 50 Marcus Clarke, which were both 100% pre-committed to government entities on 15 year lease terms. Other major developments have also enjoyed robust absorption. At 121 Marcus Clarke, following major leases with Ernst and Young and ISIS, all but one of the tower levels are now fully leased, however only one floor below the tower has been committed at this stage. At Equinox Business Park, the major tenant Thales absorbed 4,000m², however with smaller leases totalling almost 7,000m², the residual space of approximately 11,000m² remains vacant. Lease expiries in the medium term that could influence potential demand and are possible
into Nishi Towers as well as some small additional residual backfill space at 1 and 5 Farrell Place. The consolidation of the constituent departments of DEEWR into 50 Marcus Clarke involved vacating 20,000m² at the Airport, which was leased until November 2011 and is currently available as sub-lease space. The Attorney General’s Department will cease some leases in older buildings in Barton when they relocate opposite their major tenancy at 4 National Circuit. Additionally, there is the potential upside for withdrawal volumes as owners of secondary stock are faced with the choice of either upgrading premises or leasing in the weaker secondary market. Some owners are also looking at residential conversions. For example 38 Akuna Street, which consists 12,522m² of commercial space, is being redeveloped into a 16 level residential tower consisting of 330 units with construction expected to commence in June 2011.
www.knightfrank.com
Rental Levels The rise in Canberra vacancies is flowing through to the rental market with the relatively shallow depth of tenants compared to leasing options placing downward
with Civic secondary incentives approaching
12 months to now average $372/m². The
13% compared to 11% for Barton. The rental
precinct continues to reflect high vacancies
outlook for Barton appears more robust given
with incentives ranging from 12% to 17%.
the tighter vacancy profile in addition to it’s attraction to government organisations.
Figure 2
A-Grade Gross Rents and Incentives By region ($/m2)
pressure on rents, particularly with regards to
In Town Centres, the tenancy profiles that are
average incentive levels. Incentives are
underpinned by one or two government
450
impacting more heavily upon secondary
departments, such as Woden with Health or
400
stock, where higher vacancies are forcing
Tuggeranong with Human Services
350
owners to become increasingly competitive to
(Centrelink, Medicare), has meant that rents
300
secure tenants. A-grade gross effective rents
have held up relatively well. Gross face rents
250
have moderated between 1.0% and 2.5% over
for A-grade property now average $376/m²
200
the last 12 months, however have shown
and have been broadly flat since April 2010.
150
signs of stabilising over the last two quarters.
Higher rents are achievable for new stock,
100
Gross face rents average $419/m² in Barton
Civic and Barton both range from 8% to 10%.
continue to experience downward pressure.
Civic’s secondary vacancy rate of 18.7% has
At the Airport precinct, A-grade gross face
caused some disparity between precincts
rents decreased a little over 1% over the last
Gross Effective Prime rents
Airport
secondary rents in the Town Centres will
conditions in Barton. A-grade incentives in
Town Centres
gross rent of $395/m². Indications are that
0
Barton
which is reflective of the tighter market
commenced in February 2010 equating to a
50 Civic
and are marginally higher compared to Civic,
with DoHA’s lease at the Sirius Building that
Incentive
Source: Knight Frank
Table 2
Recent Leasing Activity
(New leases over 500m² and significant renewals over 1,000m²) Canberra
Address 51 Allara Street
Region
Area (sq m)
Face Rental ($/m²)
Term (yrs)
Lease Type
Tenant
Start Date
City
7,879
396g
10
Renewal
DRET
Jul-11
Greenway
3,835
345g
9
New
Medicare
Jul-11
121 Marcus Clarke Street
City
1,427
U/D
8
New
ARIA
Jul-11
121 Marcus Clarke Street
City
850
U/D
8
New
Brown Consulting
Feb-11
150 Soward Way, Tuggeranong
212 Northbourne Avenue
Braddon
1,220
390g
5.3
New
Datacom
Jan-11
243 Northbourne Avenue
Lyneham
1,043
345g
7
New
SMEC
Jan-11
Scollay Street
Greenway
760
365g
3
New
Human Services
Dec-10
City
1,328
385g
10
Renewal
St George
Oct-10
Fyshwick
750
260g
5
New
Dept Finance
Oct-10
70 Kent Street
Deakin
712
425g
10
New
Canberra Sleep Lab
Sep-10
70 Kent Street
Aug-10
60 Marcus Clarke Street Dairy Road
Deakin
3,788
430g
8
New
Thales
1-3 Constitution Avenue
City
7,506
385g
10
Renewal
ACT Government
Jul-10
121 Marcus Clarke Street
City
2,796
U/D
12
New
Ernst & Young
Jul-10 Jul-10
121 Marcus Clarke Street
City
1,398
U/D
10
New
ISIS
Braddon
931
365g
5
New
Commonwealth Grants Comm.
Jul-10
14 Childers Street
City
970
445g
7
New
Sparke Helmore
Jun-10
15 National Circuit
Barton
935
430g
5
New
CSC
Jun-10
10 National Circuit
Barton
786
380g
5
New
Computer Associates
Jun-10
14 Childers Street
City
1,923
407g
12
New
Legal Aid
Apr-10
86-88 Northbourne Avenue
54 Marcus Clarke Street
City
507
375g
5
New
Synergy IT
Apr-10
39 Brisbane Avenue
Braddon
641
427g
2
New
Treasury
Mar-10
82 Northbourne Avenue
Braddon
987
410g
5
New
AFP
Feb-10
City
1,257
430g
7
New
Australian Reinsurance Pool Corp
Jan-10
14 Childers Street Source: Knight Frank
g gross
U/D refers undisclosed
5
APRIL 2011
CANBERRA OFFICE Market Overview
INVESTMENT ACTIVITY & YIELDS A very limited number of investment sales
leases, while the growing importance of
The most significant CBD transaction in 2010
have been recorded in the Canberra market
environmental ratings will support assets
was the AusAid Building that was bought by
over the past year. While nationally
with green credentials. This trend is reflected
Emboss Capital from Orchard Funds
transactions picked up after a sharp decline
in the latest IPD Green Index, which showed
Management for $55.2m in December 2010.
in 2008 and 2009, the Canberra market hass
that over the two years to December 2010,
Occupied entirely by AusAid, the lease
behaved differently, with 2010 transactions
total returns for office assets with Green Star
expires in 2022 plus two 5 year options. The
levels below that recorded in the two previous
ratings or NABERS ratings in excess of four
lengthy WALE was reflected by the transaction
years.
stars have outperformed the broader market.
equating to a core market yield of 7.25%.
Figure 3
Figure 4
Value of Transactions (over $10m)
Canberra Regions
Canberra Office Investment Sales 1,000
rating a 4 star NABERS Energy rating, the sale
Average A-grade Core Market Yields
$m
900 800 700
assets with strong WALEs currently trade. The other major A-grade transaction was the
8.5%
purchase of 6 National Circuit, Barton by
8.0%
Doma Group for $19.2m. Doma purchased the
7.5%
500
7.0%
400
exemplifies the premium at which modern
9.0%
600
4.5 NABERS rated building on a vacant possession basis with the building still being untenanted. The $/m² rate of $3,108 was
6.5%
300
relatively low for an A-grade asset, however
6.0%
200
was reflective of the underlying circumstances of the sale.
5.5%
100
In December, 2010, Pharmacy Guild House in
Jan-11
number of assets are currently being
Jul-10
Centres are on average 25bps softer. While a
Jan-10
between 7.5% and 8.5%, while yields in Town
Jul-09
grade yields in Civic and Barton now ranging
Barton
Jan-09
Yields have remained flat with average A-
Jul-08
Civic
Jan-08
Jul-07
Jan-07
Source: ource: Knight Frank
Jul-06
20 10
2009
2008
2007
2006
Jan-06
5.0 % 2005
0
Developed in 2008 and with a 5-star Green
Barton was sold by Guild of Australia to KDN
Tow n Ce ntres
Group for $25.1m. The sale benefitted from a five year WALE, however demonstrated the
Source: Knight Frank
yield differential between asset grades, with the B-grade asset trading at a core market
As investment activity returns, it is anticipated that a distinct ranking will emerge between A-grade and secondary yields and in
In terms of land sales, a Canberra
the absence of a strong lease expiry profile,
marketed, marketed, existing owners appear comfortable to hold assets until they can execute on a satisfactory yield. Assets that stand to outperform include those which are underpinned by long term government
development syndicate BDC ACT has paid
yields can push out significantly. Secondary yields are estimated to range on average from from 8.75% to 11.00%, depending upon quality and income profile.
yield of 8.95%.
$6.8m for a 4,498m² vacant site in Forrest, which will allow for a new office development of up to 24,000m² that will likely be targeted towards a government tenant.
Table 3
Recent Sales Activity
Canberra
NLA (m²)
$/m² NLA
Vendor
Purchaser
Sale Date
6.80
Core Market Yield (%) n/a
4,498*
1,512*
Land Development Agency
BDC ACT
Mar-11
B
25.06
8.95
6,532
3,857
Guild of Australia
KDN Group
Dec-10
AusAid Building, 255 London Circuit, Civic
A
55.20
7.25
9,167
6,022
Orchard Funds Management
Emboss Capital
Dec-10
6 National Circuit, Barton
A
19.20
VP
6,178
3,108
Masonic Centre
Doma Group
Aug-10
Address
Grade
Price ($ mil)
28 Sydney Avenue, Forrest
Site
Pharmacy Guild House, 15 National Circuit, Barton
Source: Knight Frank
6
*site and $/m² site
www.knightfrank.com
OUTLOOK
therefore likely that vacancy pressures will
residential, other alternative uses or site
remain on older stock as tenants move to new
consolidation.
premises that, in the case of government entities, meet minimum environmental
The discrepancy that exists between A-grade and secondary stock in the Canberra market is forecast to continue shaping asset performance. While WALE remains critical to value, the high proportion of Government tenants and their commitments to sustainability will support assets with green credentials. NABERS ratings will be a key driver of performance and a likely impediment for lower grade stock.
sustainability criteria. Government tenants have been keen to commission purpose built office buildings as part of their commitment to improve efficiency, both economically and environmentally. However the availability of a number of A-grade vacancies provide alternative options for tenants, which could
returns in 2012.
6.0% 4.0%
50
2.0%
ratings, owners of secondary stock will be faced with a decision of whether to upgrade
0
0.0%
six months to
or try and lease an asset in an environment of
New supply (LHS)
high secondary vacancy. As an alternative,
Vacancy rate (RHS)
there is the potential that some older stock
Source: PCA/Knight Frank
could be redeveloped or repositioned as
Jan-13
over 2011, before effective rental growth
8.0 % 100
Jan-12
upward pressure will remain on incentives
10.0%
150
number of projects in the pipeline.
With the growing importance of NABERS
14.0% 12.0%
Jan-11
secure pre-commitments, some modest
200
Jan-10
surplus by 2012/13. As developers look to
pro jected
Jan-09
commitment to return the national budget to
16.0%
250
Jan-08
currently available and the Government
Canberra Region (000s m²)
Jan-07
2011 given the depth of tenancy options
Vacancy Rate vs Gross Supply
assist to absorb current vacancies and also push out the expected completion of a
Face rents are forecast to remain flat over
Figure 6
Reburbished (LHS)
Figure 5
A-grade Gross Effective Rents Civic and Barton Average ($/m²) 440 P ro jected
420 400 380 360 340 320 300 280
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
260
Source: Knight Frank
After a sharp run up in vacancies to mid 2010, it is forecast that the 14.1% achieved in July 2010 will represent the peak in the cycle. The
current vacancy rate of 13.4% is expected to gradually decline, however will remain above
12% for the next two years. While there are a number of development sites in Canberra,
particularly within the Civic precinct, these developments will not proceed without a
satisfactory level of pre-commitments. It is
121 Marcus Clarke, Civic. Owned by MTAA Super, the 26,000m² project was completed in Q2 2010. The building is targeted to achieve a rating of 4.5 NABERS Energy and has been awarded a 5 Star Green Star.
7
RESEARCH
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8
Knight Frank Research Nick Hoskins Research Manager - NSW +61 2 9036 6766 [email protected]
Commercial Agency Contacts Terry Daly Managing Director, Canberra +61 2 6221 7869 [email protected]
Matt Whitby National Director – Research +61 2 9036 6616 [email protected]
Nicola Cooper Director, Leasing +61 2 6221 7861 [email protected]
Jennelle Wilson Associate Director – Research QLD +61 7 3246 8830 [email protected]
Daniel McGrath Manager, Commercial Sales/Leasing +61 2 6221 7882 [email protected]
Justin Mahnig Research Manager - Vic +61 3 9604 4713 [email protected]
Pip Doogan Leasing Executive +61 2 6221 7879 [email protected]
Matthew Mason Research Analyst –SA +61 8 8233 5232 [email protected] Alison Smith Research Analyst - WA +61 8 9225 2434 [email protected]
Knight Frank Research provide strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, financial and corporate institutions. All recognise the need for the provision of expert independent advice customised to their specific needs. Knight Frank Research reports are also available at www.knightfrank.com. © Knight Frank 2011 This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not permitted without prior consent of, and proper reference to Knight Frank Research.
