The year that was and market expectations for QLD in 2021

CAPITAL MARKETS

2020 has been a mixed season for the office capital markets in Brisbane with solid investor demand hamstrung by limited availability of assets for sale.

According to Anthony Ott, Managing Director of Queensland at Savills Australia, investor demand has been heavily focused on longer WALE, secure income streams.

“While availability of this product has been limited, asset sales have reflected strong pricing as seen with the sale of 14 Stratton Street, Newstead on a 10 year sale and leaseback from Mater Misericordiae to Charter Hall Social Infrastructure Trust on an equated yield of 4.84%. At the other end of the spectrum, investors seeking core plus or value add opportunity have had difficulty in aligning pricing with vendors expectations due to the subdued leasing activity and uncertainty around ongoing tenant demand.”

The Brisbane fringe and suburban market has been more active than the CBD with only one transaction above $10m being recorded in the CBD.

“The stronger activity in the fringe reflected more on availability of product rather than a shift in demand away from the CBD. While there had been a number of CBD assets offered to the market through the year, only 340 Adelaide Street had successfully transacted at this point in time, however there were a number of buildings under due diligence.”

Activity from offshore investors was impacted due to the obvious restrictions of closed borders and the additional land tax surcharge imposed by the State Government.

“This additional 2% surcharge is an unnecessary impediment, particularly when governments should be encouraging investment and stimulating the economy. That said, the spike in offshore investment activity in Brisbane occurred as Sydney and Melbourne became more competitive and prohibitive to investors seeking yield, however changing market conditions this year has refocused a lot of this foreign investment back on to the southern capitals.”

Mr Ott is optimistic that 2021 will see a marked increase in activity given Brisbane and the broader Queensland economy has rebounded well as COVID-19 imposed restrictions loosened.

“Queensland has a very diverse industry base and has benefited from the growth in the healthcare and technology sectors, as well as an improving mining sector. There is also approximately $50bn of infrastructure underway or committed in QLD which will see a positive rebound in jobs growth. So, we expect leasing conditions to improve in 2021, giving investors confidence that leasing demand will improve and rents will be sustainable. The challenge will again be availability of assets that owners are willing to trade given the low cost of debt, and the limited returns from alternative asset classes.”

OFFICE LEASING

According David Howson, State Director of Office Leasing at Savills Australia, the Brisbane Office market has seen quite the mood swing throughout 2020 with the early stages of the year full of promise and enthusiasm, followed by the challenges presented by COVID and the now infamous Working from Home (WFH) debate.

“Fortunately for Brisbane, the direct impact of COVID-19 to our city was very limited, thus allowing a relatively early opportunity to return to the office.

“Whilst the Brisbane environment was more fortunate than most, many continued to WFH and it was recorded that returned worker occupancy was still sitting at the mid 60% of pre-COVID-19 numbers in November, a sure hangover from effects on the ground with business HQ’s typically located in NSW and Victoria.

“This also signaled that whilst things were returning to normal, there remained a reluctance to return to prior work practices and the adaption of a new work/life balance was in the works.

“The good news is that at the time of writing this, our city is the fullest we have seen it since the pandemic hit. Activity is at an all-time high for the year and there is a strong feeling of excitement for what 2021 has in store for the Office Leasing market.

“Generally speaking, we expect to see a continued lift in momentum, as the “workspace of the future” becomes clearer and those that delayed decisions, due to pandemic related uncertainty, start to activate their plans for the future.

“From a National perspective Brisbane is poised to navigate the challenges well with most local offices featuring essential frontline workers, as opposed to other markets that house larger “back-of-house” style staff.”

METROPOLITAN & REGIONAL SALES

Queensland Metropolitan Markets have remained relatively buoyant during 2020 but noting a distinct buyer pivot towards defensive assets.  

Gregory Woods, Savills Director of Metropolitan Markets noted an increased buyer appetite for defensive style Investments particularly those secured by medical tenants. The medical sector is considered a non-discretionary spend sector along with Supermarkets and are viewed as a haven during times of economic uncertainty like that experienced throughout 2020.  

A notable sale negotiated during the peak of the Queensland COVID-19 lockdown Q2 2020, by the Metropolitan Markets team was the off-market sale of College Junction, a medical centre, for $36,500,000 to the Dexus Property Group. The fully leased medical centre was in the Blue Chip inner north suburb of Clayfield and consisted of a 3,118sq m facility over 3 levels plus a basement carpark and showed a WALE of 8.8 years.

Looking forward to 2021 we expect the appetite for defensive assets to continue from both Private and Institutional buyers. We also expect the high net worth value add buyers who have been patiently waiting to make a return to the market with expectations that the green shoots of tenant activity will return in Q1 and Q2 of 2021.  

INDUSTRIAL

Callum Stenson, State Director of Industrial & Logistics at Savills Australia, believes “resilient” is the word that best describes the Brisbane industrial Market of 2020.

“At the start of the year there was an equal amount of people saying the market had peaked or was still going to run; no one foresaw COVID-19 and certainly the impact that this would have on our market and more importantly the global implications of the pandemic.

“However, the industrial market has benefited from the increase in ecommerce, which in turn has increased the demand for warehousing. At the start of the pandemic there was a flurry of shorter term leases, with many based around medical supplies. But as the year has progressed the flight quality and the consolidation story are still ringing strong.

“Rents have held up really well and the average time on market for speculatively built warehouses over the last two years, including COVID, now sits at three months. Average prime rents in Brisbane now sit at $119/sq m and the vacancy rate for buildings over 3000sq m is 6.4%

“Investment demand in the industrial sector has driven yields to record lows and there has been competitive activity from both domestic and offshore investment groups including Charter Hall, Mapletree, ESR and Centuria being amongst the most active. Yields below 5% are no longer unusual and the average initial yield in Brisbane is 6.1%.

“The buyer side is dominated by the large institutional style buyers whilst on the sell side, owner occupiers’ Sale and Leaseback transactions have dominated the story line headlined by the two tranches of the Aldi portfolio.

“Finally, the land market is also now having its run with prices in some areas having increased by at least 15% since the onset of COVID, the willingness to speculatively build and low interest rate environment, which is bringing back the owner occupiers.

“Looking forward, we think 2021 bodes well for the Brisbane industrial market, however stock will be harder to find which might lead to more pricing pressures.”

HOTELS & PUBS

According to Leon Alaban, National Director, Hotels at Savills Australia, hospitality and tourism are two of the main industries that felt the brunt of COVID-19. For many, the corner has now turned, and trade is returning.

2021 appears to be holding the candle at the tunnel’s end and operators and owners are looking to a brighter period as the economy continues its recovery. Keeping COVID-19 suppressed in Australia will be the linchpin for the recovery, the movement of buyers between the states will be the catalyst ensuring liquidity within the property sector. In terms of property, the hospitality & tourism market is set for a strong year of activity with operators and buyers seeking yielding assets.

Hotels market

Mr Alaban said provided that the domestic travel market stays open, improved trading conditions are expected by the end of 2021.

“Local investors, national or international that already hold a footprint within Australia are expected to lead the way with acquisitions. Property transactions are anticipated to be more prevalent as operators/investors understand what the new normalised trade looks like.

“Non-performing/non-core assets are likely to be traded as groups reposition their portfolios and hotel development sites will transact as investors take a longer term view on the industry.”

Pubs market

“In 2021, I expect we may see VIC and NSW hoteliers diversify their portfolios by venturing to the Sunshine State. Yields are expected to compress as buyers seek returns better than term deposit interest, and property is considered a safe haven investment.

“Large regional assets will be sought after as buyers continue to seek higher yielding returns along with large suburban metro gaming venues will remain the sought after commodity.”

Caravan & Tourist Parks market

Mr Alaban said demand for caravan and tourist parks will remain strong for South East Queensland and yields have the potential to tighten as stock levels remain tightly held.

“Permanent living parks will continue to be favourably considered particularly given their trading results during the pandemic, also tourist parks that already benefit from strong domestic trade should begin to receive close attention from both investment funds and corporate investors.

Other accommodation

Mr Alaban expects that the industry will witness two markets as the Australian tourism industry recovers in 2021. “Strong performing assets will remain of great interest to fund and corporate investors seeking immediate returns.

“Whilst with regards to distressed sales, where businesses have not been able to recover quick enough, astute operators / investors will be ready seize the opportunity to pursue these assets with the view to reposition and improve,” he said.

SUNSHINE COAST

General brokerage sales and leasing throughout 2020 across various market sectors particularly in the industrial space was extremely strong especially from May to December. The office completed a total of 172 transactions for the year. Savills Sunshine Coast finalised over $61 million in settled sales and leased over $3.6 million in annual rent (industrial, retail, office).

Savills Sunshine Coast Director Scott Gardiner said in his 20+ years with the company he has not witnessed a busier year in terms of volume of transactions.

Scott recently fielded strong qualified industrial enquiries from Victorian based businesses who will be relocating to the Sunshine Coast which is a positive sign for the region in terms of employment and economic growth. Rents and land values for industrial actually increased during COVID-19 period to present.

Savills Sunshine Coast Director, Jason O’Meara said the high number of transactions were predominantly vacant warehouses, industrial investments and undeveloped industrial land, but also strong interest was seen in property development sites which, if well located with approvals in place, were in demand and selling, as too general commercial investment sales. Yields notably across the board have compressed in 2020.

Going forward 2021 is predicted to be another positive year for Savills on the Sunshine Coast with various projects on the go and or under construction. Challenge will be the now critical shortage of industrial land short term, particularly mid coast. Presently there are approximately less than 40 industrial lots available, the majority of which are located south coast, Caloundra, Aura and Landsborough. Stock is tightening however it is believed that we will see more “off market” transactions next year and potentially more receiver sales emerge. With interest rates set to remain low, yields will continue to be strong.