Melbourne office market leaves Sydney in the dust

Better at sport, a more efficiently run state government and more affordable. Melburnians can now add a stronger-performing office market to the list of things they lord over Sydneysiders.

Kevin Stanley, head of research for Australian and New Zealand at CB Richard Ellis, told Property Observer Melbourne’s prospects over the next two years were bright, with a good balance struck between growth in rentals and affordability.

Melbourne’s office rentals are on average 40% less expensive than Sydney’s, and Stanley says there is room to grow but rents are “not so high as to limit expansion”.

This mix – strength rental growth combined with affordability – should offer encouragement to investors.

“Melbourne will retain lead in the short term – up until around 2013,” Stanley says. “As new buildings are completed, this will raise vacancy rates, slow down performance relative to now, but Melbourne won’t go backwards.”

A similar sentiment is echoed by Richard De Lure, senior economist at NAB, who says the Melbourne market clearly offers more than Sydney’s in terms of capital growth rate and rental expectations and will “remain strong going forward over the next 12 months to two years”.

“There is strong demand in Melbourne and a lack of supply,” De Lure says. He identifies Sydney’s land constraints as a key inhibiting factor while highlighting Melbourne’s Docklands project as a unique facet of its market.

But Sydney investors should not lose heart – the market is improving and will soon start to shake off the shackles of the GFC, which hurt the Harbour City more than any other capital city in Australia, given the loss of jobs in banking and financial services.

De Lure expects the Sydney office market will start picking up and coming back in 2012, with white-collar jobs growth expected to be strong.

NAB’s most recent Quarterly Australian Commercial Property Survey (for the March 2011 quarter) painted a rosy picture of the national office market as one of the best performing commercial property subsectors, a position it is expected to retain over the next one to two years. Nationwide capital value expectations are for growth of 2.8 % over the next 12 months and 4.3 % over the next two years.

According to the NAB report, Victoria and the much smaller Tasmanian market currently outperform all other major office markets and they will continue to set the pace during the next 12 months (to the March 2012 quarter). Conditions in the NSW and ACT markets are also expected to improve over this period “as recovering tenant demand underpins rental growth and sales activity continues to grow”.

State-by-state outlook

According to the NAB report, vacancy rates are expected to fall in all states in 2011, “partly reflecting the still poor state of the construction sector and expectations of improving tenant demand”. Stanley concurs with this assessment.

Victoria and Tasmania - Top of the heap

Victoria and Tasmania will lead the pack on all the key criteria in 2011 – capital value growth, rental growth, office demand and market tightness. During the 12 months to March 2012, capital values are forecast to rise by 3.5%, rental growth to climb 4.6% and vacancies to tighten to 4.5% from current level of 5.3%.

In 2013 capital growth is expected to reach 4.6 %.

Western Australia - Strengthening

Capital value growth in WA is expected to match that in Victoria and Tasmania and rise 3.5 per cent by March 2012, while vacancies are forecast to fall to 4.5% over this period. NAB predicts the market will strengthen leading into 2013, with capital value growth lifting to 4.5%. Over the course of the year, office rents are predicted to rise by 4.3%, with the resources boom driving up tenant demand for office space.

NSW/ACT – On the mend 

Although their markets have been sluggish up until now due to the GFC fallout, NSW and ACT are good medium-term bets for investors, with capital values forecast to rise by 4.8% over the next two years reflecting a slowdown in supply additions and white-collar employment growth, especially in the finance industry. In the short term though, vacancy rates in NSW/ACT are expected to fall from 8.1% to the still relatively high 6.7% as some large projects are completed this year.

By 2013 vacancy rates in NSW/ACT are expected to fall to 5.8%.

South Australia – Adelaide tight till 2013 

Adelaide is set to remain a tight market over the next 12 to 18 month, with no new supply expected over this time period. The market experienced reasonable rental increases through 2010, and demand has picked up in 2011. Rental growth may come under pressure in 2012 to mid-2013 with the completion of the new ATO building, Adelaide Bendigo Bank and SAPOL bringing new stock onto the market. According to Andrew Bahr, director of office services at CB Richard Ellis, the question is “whether the local Adelaide market, which has been typically driving demand over the past 18 months, has the need and capacity to take up such a large amount of stock. The recovery of the resource sector and the demand it creates both directly and indirectly will be a major determinant.”

Queensland – poor prospects 

Investors may shun Queensland in 2011 (and possibly beyond), with growth forecast at just 0.6%, the lowest in Australia. Things should start improving in 2012 – capital values are forecast to grow by 2.1%, but the state will still lag behind the rest of the country. Vacancy rates are expected to drop from the current 9% to 6% over the next two years.