The headlines may be stirring up concerns about office rents skyrocketing. But investors need to delve into the data beneath the surface to understand why this could be good news for investors eyeing the Perth office market. Today, we’ll do that for you.
The headlines may be stirring up concerns about office rents skyrocketing, but that’s not telling us the story about the Perth office market.
The global office property market crisis, major publications tell us, has finally hit Australian shores. It’s predominantly been signalled by citing heavyweight property funds, like Dexus and Charter Hall, and their divestment of office assets with discounts of up to 17.2 per cent to their book values.
But investors need to delve into the data beneath the surface to understand why these stories are irrelevant for the west coast. Charter Hall, for example, have struggled to make redemptions to exiting investors of their Direct PDF Fund. But only 9 per cent of their office properties in that fund are located in WA. The rest are east coast assets.
(Not to mention that major funds like Charter Hall need to keep their assets at a certain loan-to-value ratio, obligating them to sell and lower their LVRs when portfolio values drop. Other funds and investors don’t have that issue. Again, there is always more to the story than meets the eye.)
There is plenty of good news for investors eyeing the Perth office market. They just need to read through the headlines.
Today, we’ll do that for you.
Demand catapulting for high-quality Perth office
When we examine the demand side of the equation, there is plenty to be optimistic about.
The data reveals a robust demand for office spaces in Perth, fuelled by a flourishing economy. The Western Australian economy has been performing exceptionally well, boasting the strongest growth in employment over the past three years, which has resulted in an impressively low unemployment rate of 3.6 per cent.
This healthy labour market is translating into heightened office occupancy in Perth’s CBD, where a staggering 80 per cent of workers are regularly coming into the office, outpacing almost every other major city across the nation.
Let’s thank the WA economy
Perth’s CBD office market has experienced sustained positive net absorption and rental growth, largely driven by the strength of Western Australia’s economy.
High white-collar employment and a thriving mining sector have contributed to a direct vacancy rate of 15.6 per cent across Perth CBD assets, further affirming the strong demand for office space in the region. This increasing demand for office spaces is corroborated by data from CBRE, which has recorded continued growth in enquiries for Perth CBD assets over the past three years.
The Perth office pipeline: positive news for investors
But what about the supply side? Well, here comes the intriguing part. The Perth office market is facing limited future supply, creating a very favourable environment for investors.
In 2023, there will be a reasonable 79,000-sqm of highly pre-committed new supply to the market, to fulfil the demand for Perth office space. But remarkably, there are no scheduled supply completions in 2024. This sets the stage for an opportune time to invest.
Looking ahead, the development pipeline includes plans for over 150,000 sqm of office space for 2025 and beyond. However, potential delays due to rising construction costs, inflation rates, and interest rates could impact these projects, making substantial pre-commitment necessary for them to proceed.
Currently, only around 32,000 sqm is under construction in WA. You don’t need to be an economics buff to know that demand growth and supply shortfalls equals rising values.
Looking back to look forward
What can we learn from the past to gauge the future trajectory of office rents in Perth?
Historically, Perth experienced remarkable rent growth during the period of 2009 to 2011, even in the aftermath of the global financial crisis when uncertainties were abound. This demonstrates Perth’s ability to thrive independently, driven by capital influxes and demand from the mining, oil and gas sector, particularly in response to China’s resources needs.
Perth’s office rental market distinguishes itself from other major Australian CBDs like Melbourne, Sydney and Brisbane, where up to 50 per cent of their occupied space isn’t even being used, because so many employees are working from home.
While headlines may suggest challenges in these cities (as we’ve mentioned) the story in Perth couldn’t be more different (as we’ve mentioned).
Why Perth office market?
A key differentiator lies in the physical occupancy rate, which indicates the proportion of available floor space currently occupied. Perth exhibits a much healthier scenario compared to other CBDs, with ample demand and promising prospects for future growth.
The Perth office market offers a tantalising prospect for investors seeking a dynamic and lucrative investment opportunity. Limited future supply, coupled with strong demand, bodes well for office rental growth in the region. And as the economy continues to thrive and occupancy rates remain robust, Perth is likely to chart its own successful course, presenting an ideal time for investors to secure strategic positions in the market.
So, don’t be dismayed by the headlines, for beneath them lies a compelling and promising narrative for Perth’s office rental market.
Thinking of investing in Perth office? Check out Pathway 21
It’s no accident we are currently offering our most exciting office investment in five years.
Pathway 21 is the result of months of homework, analysing the Perth office market and predicting its likely trajectory.
The result? We couldn’t be more thrilled to offer our investors the chance to join us in a contemporary office building, strategically located in the western corridor of the Perth CBD, with tremendous capital uplift potential. Specifically, we predict to achieve 35 per cent to 40% per cent total investor return in 18 to 24 months.
You’ll have questions. And we’ll have answers. We’re ready to provide them to you over a coffee or a phone call. So, please get in touch when you’re ready to talk.
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Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.