The year that was in WA and predictions for 2021

Graham Postma, National Head of Office Leasing & Managing Director WA at Savills Australia said whilst 2020 has certainly been a challenging year across all sectors, there has been a notable improvement in sentiment and confidence through Q4 with the run up to Christmas being as busy as any year previously.  

“The Office Leasing market remains very competitive, but demand is improving, and we expect transaction levels to increase markedly in 2021.

“Likewise, investment demand remains strong with WA being a major focus with local, national and international investor groups” he said.

OFFICE LEASING

According to David Evans Director, of Office Leasing at Savills Australia, the Perth Office Leasing market recovery post COVID-19 pandemic continues.

“With Western Australia not having been as affected as the Eastern state’s markets, due to the early and sustained WA border closure, both Landlords and occupier’s confidence gained momentum through the fourth quarter of the year.
 
“Brokerage deals have led the recovery charge. Qualified enquiry in the last six months has been lease expiry led with occupier’s preference for tenancies with speculative fit-outs or rebirthed existing fit-outs with incentives being allocated as rental rebates.
 
“Strong competition continues across all grades, particularly in the growing ‘spec suite’ space. Additional competition of circa 42,000sq m of new sublease vacancy is being driven by companies’ work from home (WFH) policies. However, whist national and global business have to maintain national COVID staffing guidelines, tenants are now better equipped to accurately predict future work from office (WFO) or WFH ratios and thus can forecast future workplace and space requirements. Local businesses continued confidence shows resilience in the space requirements.
 
“Bankwest have entered the market for 20,000 to 30,000sq m for a possible new Headquarters in 2024 and Santos seeking 10,000 to 12,000sq m in 2022/23.
 
“The education sector continues to thrive with Edith Cowan University announcing a new City Campus catering for 9,000 students at Perth City Link, next to Yagan Square. Other Universities and educational groups are expected to follow suit in terms of increasing their CBD presence.
 
“As business confidence grows particularly in the Energy and Resources markets, we are expecting an enthusiastic and active beginning in 2021,” he said.

COMMERCIAL & RETAIL SALES

Barney Dear, Associate Director of Commercial & Retail Sales at Savills Australia said the commercial office investment market in Perth was constrained through 2020, as owners displayed a reluctance to run formal on-market sales campaigns due to uncertainty around buyer appetite, the inability for interstate and international buyers to inspect, and concern around the occupier market through the lockdown and post COVID-19.

“Despite the lack of structured sales campaigns, we did see a couple of off-market transactions through 2020. Mineral Resources purchased their new headquarters at 20 Walters Drive, Osborne Park for $60.05m from BGC. Andrew Forrest’s Tattarang is understood to be purchasing 190 St Georges Terrace for circa $55m.

“The retail investment space also suffered from a lack of stock through 2020 with no formal on-market campaigns of any significance through the period. Carramar Village sold to a South Australian syndicator, FRP Capital for $33.5m, while local syndicator, Lester Group purchased the Midland Megaplex large format retail centre for $58 million, both in off-market deals.

“Despite the lack of activity at the big end of town, the sub $20 million investment and development market showed resilience through 2020. Inquiry was strong in this space as property syndicators, private investors and developers have taken advantage of the low interest rate environment and WA’s relative resilience through COVID-19.

“We look forward to a strengthening investment market across most asset classes in 2021. The easing of travel restrictions, the continued access to cheap debt, and the strength of the mining sector will give sellers the confidence to release assets to the market, resulting in increased stock levels.

“Quality commercial office assets with strong tenancy profiles and well-located neighbourhood shopping centres with limited exposure to discretionary tenants will continue to be sought after by purchasers, with yields holding firm or potentially tightening for these assets”.

RETAIL SERVICES  

Chris Ireland, Director of Retail Services at Savills Australia said the Perth retail leasing market was relatively buoyant at commencement of 2020 through to the end of March.

“COVID-19 then had a significant impact on retail turnover sales, (excluding supermarkets), given a majority of specialty and food and beverage retailers closed for business throughout this period due to social distancing restrictions that were implemented during this time.
 
“CBD and Shopping Centre vacancy levels also increased marginally due to reduced customer foot traffic and subsequent reductions in turnover, however in the last quarter of this year we identified increased activity in relation to enquiry within the Neighbourhood Shopping Centre sector. Food and beverage sales have also been positive throughout the last quarter of this year.
 
We anticipate a positive start to 2021 in deal flow from enquiry levels received in the latter part of 2020 from a majority of specialty retail categories looking for opportunities and competitive rental rates. Consumer confidence is also helping to drive turnaround in positive turnover results in some retail categories.

INDUSTRIAL & LOGISTICS

According to Matthew Hopkins, Director of Industrial & Logistics at Savills Australia, the Perth industrial market started 2020 well and finished very strongly.

“It is not necessary to highlight the difficulties that were faced by all this year and we are mindful that this has been, indeed continues to be, an extremely challenging year for many sectors. Perth’s industrial property market is however one of the sectors which has thrived despite the pandemic.

“Workshop enquiry at the end of last year was strong and as suspected this transitioned into much improved leasing take up for well-located and good quality workshop properties.  

“Vacancy levels for heavy duty, high quality workshop facilities are now less than 5% and in some sub-sectors at zero. A notable leasing transaction was that of Westrac at 32 Hitchcock Place, Perth Airport. Perth Airport took what was at the time a brave step in committing to speculatively develop a 4,768sq m workshop on a 1.4ha site in mid-2019.

“This property was under construction throughout the onset of COVID-19 and despite this managed to reach PC by September 2020. Whilst in the midst of the COVID outbreak there was some concern around the timing of the development. However, from July onwards the market rebounded strongly and as this property reached PC there were a number of groups chasing the property, with Westrac winning the race to secure a new long term lease from completion”.

Mr Hopkins went on to say vacancy levels for modern well-located warehouse stock is also reducing with many long term vacancies finally leasing over the second half of 2020. Capital prices are also on the up with rental growth now being seen at the same time as continued yield compression across the asset sector, compounded by the tightly held nature of the Perth industrial market.

“2020 has been one of the most challenging years we have ever experienced but there is no better sector to be in than Perth industrial. For the first time since the mining downturn, we have seen substantial improvement in levels of lease activity and indeed rental growth in some sectors, most notably for heavy duty high quality workshop premises.

“We have leased every workshop premises on our books and we need more. I expect to see this demand continue into 2021 and result in a drive to speculative development as tenants continue to seek modern high quality premises which are ready for immediate occupation.”

“Land prices are currently stable after seeing a significant increase last year. Savills is expecting to see upward pressure on land prices in 2021, driven by the low cost of money and the owner occupier market where the buy versus lease equation has swung firmly back to the buy side.”

Mr Hopkins stated that 2020 was the year when Perth’s industrial market regained much of the lost ground over the last six years.

“There are a number of large infrastructure projects commencing in 2021 which together with stimulus in the housing sector are driving the construction sector, not to mention a resurgent iron ore spot price.  Everything is looking positive for 2021 and when a global pandemic has failed to dampen the market in 2020, we can only expect 2021 to be a strong year for the industrial sector.”

Mr Hopkins said he anticipates that prime industrial yields will reach 5%.

“Perth has seen a lack of industrial investment stock traded over the last few years and 2020 was no different. Yield compression seen across the sector nationally has had few opportunities to be tested in Perth. We anticipate that with continued weight of capital chasing the sector, recent rental growth and yield compression aligning, this may finally see some groups look to take profits and trade.

“Our opinion is that pricing for core assets is already well above the levels that we’ve seen using historic transactions. Once we see a couple of large sales substantiate these gains, we anticipate transactions to follow on the back of the new pricing reality.”

“Investors seeking exposure to industrial asset classes must now be looking to Perth. The fundamentals have changed this year and WA has proven itself to be amongst the most resilient markets globally. Confidence has returned and a couple of key sales should recalibrate the market which in turn should open up new opportunities.”